Thursday, January 17, 2008

MBIA's future looks bleak

Liquidity --MBIA has $4 billion of bonds due in 2008. It raised $1 billion of surplus notes at the cost of 3M Libor + 11.26%. It will be quite expensive to raise another $4 billion. In the context of a company with annual annual revenue ~1 bil and Market Cap 1 bil, $4 bil bond is a large number. Asset quality --Based on 10-k, MBIA’s guaranty portfolio increased 11 billion with regard to CDO in 2006. Most of increase might be from mortgage related Asset Backed CDO. Let’s assume 50% of these assets are AB CDO, with AAA rating. Given the fact that index ABX AAA dropped around 25% in the 4th quarter, we expect write-down of 1.375 billion. That is just for CDO alone. The company has nearly 40% of guaranty portfolio (618 billion by the end of 2006) exposed to Structure Finance portfolio. Outlook --The downgrades might be fatal for a bond insurer, which requires AAA rating to keep municipal clients. In addition, the rival company setup by Warrant Buffet will definitely steel its municipal bond insurance business. --Overall SF products market will shrink significantly in the near future, impacting its insurance business for SF products --Monoline bond insurer, relying heavily on insurance business which contributes nearly 90% revenue. No cushion from other business lines. Evaluation --Company market cap 1.1 bil, trading at P/B 0.2. A blow larger than 2 billion might be fatal. - It raised 1 bill capital last in surplus notes, yielding 3M LIBOR + 11.26%, even debt financing will be more costly. Pros: -- the business looks like really profitable business, with operating margin above 80%. --bail out risk might be high since the company is distressed significantly. --The key question is how can the company raise capital. Opinion --short the company

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