INSIGHTS

On January 04, 2011

MBIA Insured Bonds

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It may be time to look at MBIA insured bonds with a different perspective. The insurer has been under immense pressure over the past three years as its foray into mortgage market insuring ended up costing it its AAA rating. Since then the company has two major hurdles to overcome. First, it split its insurance company into two units. One unit insures only municipals (National) and the other is the "bad bank" into which all of the bad assets were housed. This split was done under the direction of the New York Insurance Department which is the regulator for MBIA. MBIA has defended this split against all of the banks in the lawsuit, which is discussed in more detail in a recent Bloomberg article, “MBIA Shares Rise After JPMorgan Drops Suit Over Split.” Having JP Morgan and Barclays drop their participation in the suit is huge. In fact, we believe, the suit is without sufficient merit to cause the split of MBIA to be reversed. The muni insurance side of MBIA is doing quite well and we believe you will see a large capital injection into it once this suit goes away. The trial date is set for January. We look for a dismissal or settlement.

The second challenge for the holding company is to recover billions of dollars from those same banks based upon fraudulent procurement of insurance. The suit basically alleges that these banks knew, or should have known, that the quality of loans they were getting MBIA to insure were much less than what they represented. We now see the defendants in this case (the banks) reserving funds in anticipation of having to make MBIA whole. This money would go to the "bad bank" side of MBIA but these amounts are measured in the billions. We think a settlement is imminent.

Bottom-line is that we think that muni bonds insured by MBIA deserve another look. We think the market has written off the insurance value of bonds that were insured, which we believe is overdone. We are suggesting that investors take another look at MBIA insured bonds where the underlying credit is sound as we see value here.

Finally, for those with an appetite for risk in the junk market, you might want to look at the MBIA corporate debt. We do own the credit in our Credit Opportunities discipline for disclosure purposes. We think the credit continues to improve. We like the senior bonds here (6.4% due'22) better than the surplus sub notes which are 144(a). Remember the risk here is elevated and suitability attention is required.

The story here continues to improve and we think there is a large amount of opportunity.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.