MBIA Prices Surplus Notes

MBIA announced that it has priced the surplus notes that it will use to raise the $1 billion capital required by rating agencies to maintain its AAA rating. For those not following the topsy-turvy world of the monolines, this may not sound too important, but this is probably one of the biggest events of the year for MBIA (and others). On top of enabling the insurer to ratain its prized AAA rating, it was absolutely crucial for the monolines to signal that they have the capability to raise capital when needed.

The details of the notes:

Surplus notes maturing January 15, 2033
15% initial coupon until Jan 15, 2013 (paid semi-annually)
(LIBOR + 11.25%) after Jan 15, 2013
Callable by MBIA every 5 years at par
Ratings: AA/AA/Aa3
$1 billion offering


No doubt the interest rate is steep but not as bad as it seems for MBIA shareholders. First of all, this is some sort of a subordinated equity-like instrument. Secondly, the bond is callable at par so if the company survives and has a good balance sheet, it will definitely call them in 5 years. Investors in the notes are pretty much guaranteed to get 15% for 5 years (unless you think MBIA is going to go bankrupt).

Although the interest rate is going to shave off quite a bit out of earnings for the next few years, I think the 5 year call feature pretty much limits the damage this note can do to MBIA.


It remains to be seen what Ambac will undertake. MBIA is a similar size to Ambac and it already raised $1 billion before with the Warburg Pincus deal so this is its second round of financing. In contrast, Ambac really hasn't done any big moves yet. Ambac increased its capital position by about $250 million by unloading $25 billion in municipal bonds to Assured Guaranty. So I am thinking that Ambac has more options. It doesn't really need to issue $1 billion of notes. It can mix it up with some more reinsurance, share issuance, preferred shares, notes, and bonds. I might be biased but Ambac should end up with a lower cost of capital than MBIA (at least for the time being). Since Ambac shareholders are already deep in the red, I don't think a partial share issuance is a bad thing.

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