Monday, December 24, 2007 3 comments ++[ CLICK TO COMMENT ]++

Martin Whitman Comment About Bond Insurers on CNBC

Martin Whitman recently commented on the bond insurers and how he had increased his stake in Radian, MGIC, MBIA, and Ambac. He supposedly owns 10%+ of both Radian and MBIA (versus less than 3% in each early in the year). He isn't concerned with Bill Ackman's stance and thinks Bill Ackman understands neither the insurance business nor restructurings.

There is an important point that one needs to think about when considering Martin Whitman's views. As Martin mentioned in the video, he is looking at this as a restructuring play. I'm not really sure how a bond insurer fits into the "restructuring strategy". Typically the restructuring plays are conventional corporations with reasonably estimable losses and liabilities. The big problem with the bond insurers is the uncertainty of future losses. Martin Whitman emphasizes that this is a long term play, where he wants to be part of any restructuring. I don't really understand his point about restructuring. Is he talking about restructuring the bond insurer (like Ambac)? Or is he talking about restructuring the holdings of the bond insurer (i.e. underlying asset of the bond being insured)?

If Martin Whitman is trying to profit off the restructuring of the bond insurer, there is a risk to small investors from debt. It may be possible for bondholders to take over. Whenever someone mentions "restructuring" I get nervous. Generally shareholders are either heavily diluted or completely wiped out and bondholders end up running things. I hope this is not what Martin Whitman has in mind (I'm not sure how much of the debt he owns; Ambac had $1.8 billion of debt outstanding); However, I doubt this is the case because he also owns a huge chunk of the stock so it is unlikely that he will waste money buying shares if he is trying to play for the control of the company via debt. If you don't think Martin Whitman will do anything to benefit bondholders at the expense of shareholders, then he is one of the best people to have on your team for any restructuring issues. Martin Whitman is one of the best at investing in distressed situations.

I'm eagerly awaiting Third Avenue Fund's quarterly report (I'm guessing it will come out by the 3rd week of January).

Thanks to Neanderthal for this find.

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3 Response to Martin Whitman Comment About Bond Insurers on CNBC

Neanderthal
December 24, 2007 at 5:02 PM

I don't think this is a bond play at all. First, as you said, they would not go owning 10% of MBI only to have it wiped out with a bond play. Second, in order for the bond holders to get control of the company, there first must be a none payment from the company. At least to this point, cash flow is not a problem with MBI and ABK. It is their ratings that needs saving. Even if they lost their ratings, they would still be able to pay the bond holders. I also feel better that Marty is on our side.

John

December 25, 2007 at 12:08 PM

Sounds like he's saying a reorganization would be cash infusion. I'd speculate that he means the reorganization story wouldn't involve bankruptcy. On the other hand, I'm guessing he picked up the debt at a price that makes the yield very attractive.

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