After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes?

By: Reggie Middleton | Thu, Jan 17, 2008
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This is from MBIA's recently published 8k. If you have not done so already, it is strongly recommended that you read the November blog post: Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton.

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

On January 16, 2008, MBIA Insurance Corporation ("MBIA"), a wholly-owned subsidiary of MBIA Inc. (the "Company"), issued $1.0 billion principal amount of Surplus Notes due January 15, 2033 (the "Notes") with an initial interest rate of 14 percent until January 15, 2013 and thereafter at an interest rate of three-month LIBOR plus 11.26 percent. As a point of reference:

London interbank offered rate, or Libor
  Latest Wk ago High Low
One month 3.98938 4.37063 5.82375 3.98938
Three month 3.95125 4.44250 5.72500 3.95125
Six month 3.79375 4.26250 5.59500 3.79375
One year 3.42375 3.86438 5.50656 3.42375

The Notes were issued pursuant to the Fiscal Agency Agreement, dated January 16, 2008 (the "Fiscal Agency Agreement'), entered into between MBIA and The Bank of New York ("BONY"), as fiscal agent (the "Fiscal Agent"), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended.

The Notes are subordinate in right of payment to all existing and future debt issued, incurred or guaranteed by MBIA, all existing and future claims of policyholders and beneficiaries and all other creditor claims which have priority over claims with respect to the Notes under New York insurance law, other than any future surplus notes or similar obligations. Each payment of interest on or principal of the Notes (including upon redemption) may be made only with the prior approval of the New York Superintendent of Insurance and only out of surplus funds available for such payments under the New York Insurance Law.

MBIA has the option to redeem the Notes in whole or in part on January 15, 2013 and the interest payment date occurring in January of each fifth succeeding year thereafter at a redemption price equal to the principal amount of the Notes to be redeemed together with any accrued and unpaid interest to the redemption date, and on any other date at a "make-whole" redemption price set forth in the Notes.

The Notes do not include any restrictive covenants.

In the event of MBIA's rehabilitation, liquidation, conservation or dissolution, the Notes will immediately mature in full without any action on the part of the fiscal agent or any holder of the Notes, with payment thereon being subject to the satisfaction of the conditions to payment described herein.

In no event shall the Fiscal Agent or any holder of the Notes be entitled to declare the Notes immediately mature or otherwise immediately payable.

The Bank of New York has from time to time engaged in, and will continue to engage in, banking and other commercial dealings in the ordinary course of business with MBIA and its affiliates. The Bank of New York has received, and will continue to receive, customary remunerations with respect to these transactions.

From my second blog post on MBIA (the Scary Halloween Story) and the monolines dated Tuesday, 13 November 2007...

Being so sensitive and exposed to CDOs, one would be curious as to what happens if the CDO spreads widen. Well...

Effect of Change in spread in CDO
Figures in Million of dollars
As of 31/12/2006
CDO Exposure 130,900
Statutory Capital Base 6800
Assumed Duration of the CDO bonds 5  
Change in Spread that can eliminate capital
In bps 104  
Capital Eroded 6807
Remaining Equity -6.8

So, an increase of 104 basis points in CDO spreads wipes out the equity of MBIA, TOTALLY wipes it out.

To put this into perspective, let me show you the entire sensitivity grid. Hey, no matter which way you look at, these guys are at risk. They have $6,800 in capital. Just move your finger over any combination of CDO duration and spread in basis points, and if you come close to that 6,800 figure, bingo! The current duration average is approximately 5 years. So the question is, "Will spreads reach 104, or more?" Well, look at the charts above that I posted from Pershing. Better yet, look at the subprime underlyings performance, which can be mimicked by the ABX from Horrendous, indeed.

  Sensitivity Analysis
  Spread in BPS
Duration   100 102 104 106 108
3 3,927 4,006 4,084 4,163 4,241
4 5,236 5,341 5,445 5,550 5,655
5 6,545 6,676 6,807 6,938 7,069
6 7,854 8,011 8,168 8,325 8,482
7 9,163 9,346 9,530 9,713 9,896



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

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