Interest Rate Roundup

Monday, December 10, 2007

Another day, another capital infusion

We're seeing so many of these deals, it's hard to keep up. The latest: Bond insurance firm MBIA is getting up to $1 billion from private equity firm Warburg Pincus. Here's the important stuff ...

"MBIA Inc., the holding company for MBIA Insurance Corporation, today announced that it has entered into a definitive agreement with Warburg Pincus, the global private equity firm, which will commit to invest up to $1 billion in MBIA through a direct purchase of MBIA common stock and a backstop for a shareholder rights offering.

"MBIA said the investment will, among other things, increase MBIA’s already substantial capital and claims-paying resources and enable MBIA to grow its business profitably at a time when market conditions present it with attractive opportunities.

"Under the agreement, Warburg Pincus will make an initial investment of $500 million in MBIA through the acquisition of 16.1 million shares of MBIA common stock at a price of $31.00 per share, which represents a 3 percent premium to the $30.00 a share closing price of MBIA common stock on the New York Stock Exchange on Friday, December 7, 2007. Subsequent to its initial common stock purchase, Warburg Pincus will backstop a shareholder rights offering of up to $500 million that the Company expects to undertake during the first quarter of 2008. In connection with its investment and backstop commitment, Warburg will receive warrants to purchase 8.7 million shares of MBIA common stock at a price of $40 per share and “B” warrants, which, upon obtaining certain approvals, will become exercisable to purchase 7.4 million shares of common stock at a price of $40 per share. The term of the warrants is seven years. In addition, all of the securities purchased by Warburg Pincus are subject to significant transfer restrictions for a minimum of one year and up to three years."

Meanwhile, MBIA shared some more details about potential losses related to the mortgage mess. The company said that "as a result of continued deterioration in the performance of residential mortgage-backed securities, in particular, prime home equity lines of credit and closed-end second mortgage-backed securities the Company currently estimates that it will establish case basis loss reserves of between $500 million and $800 million in the fourth quarter related to those exposures."

And MBIA talked about the impact of the CDO deterioration on its portfolio: "The Company has observed a further widening of market spreads and credit ratings downgrades of collateral underlying certain MBIA-insured CDO tranches. As of October 31, 2007, the pre-tax change in fair value of insured derivatives (“mark-to-market”) from September 30, 2007 was approximately $850 million. As a consequence of continued spread volatility, including a substantial widening in commercial mortgage-backed security spreads and the deterioration of credit ratings in collateral underlying multi-sector collateralized debt obligations (CDOs), the Company expects to have a mark-to-market loss in the fourth quarter of 2007 significantly greater than that of the third quarter. The ultimate mark-to-market for the fourth quarter will depend on future market developments."


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