Saturday, April 5, 2008 0 comments ++[ CLICK TO COMMENT ]++

Some Positives For the Tainted Monolines

The "tainted" monolines have been shrouded in darkness for at least an year now but there is some light starting to show in the darkness. Two items I want to point out are (i) MBIA managed to write some new muni bond business, and (ii) some customers are buying MBIA insurance over higher-priced insurance from FSA. Although these are very tiny steps, it does indicate the possibility of things turning around.

First item to note is that MBIA actually managed to insure about $373 million for some toll road in north Texas.

MBIA Insurance Corporation, a subsidiary of MBIA Inc., today announced it has guaranteed $373 million of a $3.0 billion bond issued by the North Texas Tollway Authority (NTTA). Proceeds will be used by the NTTA to refund certain outstanding bonds and to refinance outstanding short-term debt issued in 2007, which funded the $3.2 billion upfront payment to the North Texas region for State Highway (SH) 121. The SH 121 is the sixth toll facility in the NTTA system and a crucial addition to the transportation infrastructure of the Dallas-Ft. Worth Metroplex.

Although it's a small deal, it does indicate that some customers are willing to use MBIA's services. It is also importatn to note that this is in the "municipal" sector, where competition is fierce with the untainted insurers like Assured Guranty and FSA, not to mention new entrants like Berkshire Hathaway Assurance, having a huge competitive advantage.

The other minor, yet important, point I gleaned from a Reuters news article is the following:

Tom Spalding, portfolio manager at Nuveen Investments in Chicago, said the prices of municipal bonds insured by MBIA are unlikely to cheapen after the Fitch downgrade, but price improvement will slow.

"Retail will still buy MBIA insurance, but I don't think institutions are going to be quite as aggressive," Spalding said.

The prices of MBIA-insured munis have been edging higher since Standard & Poor's and Moody's Investors Service affirmed the guarantor's triple-A rating, Spalding said.

Some municipal issuers started using MBIA again because rival Financial Security Assurance, owned by Dexia SA, which boasts untainted top ratings from three agencies, has gotten too expensive, Spalding said.

No doubt it's good news for MBIA to see customers back away from competitors due to high prices. As I have said from the day BHAC entered the market, the only way Ambac (and MBIA) can compete in muni bonds is to undercut the competitors. Under normal business conditions, it is likely that Ambac and MBIA have lower operating costs compared to the smaller outfits like AGO, BHAC, and maybe even FSA, but we can't bank on that for the time being. Given the class-action lawsuits launched against Ambac and MBIA by disgruntled shareholders, not to mention potential future lawsuits from activist groups, government agencies, and others, the cost advantage will be lost for the next few years.

All in all, the events are minor but it's positive for MBIA. As an Ambac shareholder, I hope Ambac can get some momentum and turn its corner as well. Although Ambac may have a slightly lower risk profile than MBIA (it has more CDO exposure but MBIA has extremely scary HELOC/CES exposure), I feel like Ambac's management is much weaker.

The real big events for the tainted monolines will be 1st quarter earnings reports, which should come out over the next month. There will likely be further mark-to-market losses but the important thing to watch is credit impairment. Recall that the recent episode of the crisis started when Ambac posted a $1 billion impairment. Another deterioration in insured credit and it'll be close to game over for old shareholders. The rating agencies may consider cutting the AAA rating if unexpected real losses weaken the companies' financial capability. Management recently rolled the dice on a high stakes game of diluting the shareholders heavily in the hope of maintaining a AAA rating so any bad rolls and...

(I still think it will be difficult for old shareholders to make money unless they average down. At best I only see a breakeven return. For example, I purchased Ambac around $25 and say the price is $5 right now. Then it has to go up 5x, which is 600%. How often does a stock price go up 600% in a short period of time? Unlike a "normal" company, such a big move can happen to distressed companies but that's an extremely optimistic case.)

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