Interest Rate Roundup

Friday, January 11, 2008

MBIA will probably get its money, but at a hefty price

Looks like MBIA, the bond insurer, will probably get its $1 billion in capital. But it's going to pay a pretty penny to do so -- 14% interest, according to this report. Here are some more details:

"MBIA needs to sell the notes to shore up its capital position and secure funding for possible claims if there are defaults on bonds that it insures. Fitch last month threatened MBIA with a downgrade, raising questions about whether it has enough capital in the event of defaults. MBIA's cash position is threatened by its exposure to assets backed by poor quality subprime mortgages.

"Adding to the company's woes, some hedge fund operators have been shorting MBIA stock in a market bet that it will be driven into bankruptcy.

"The offering also is complicated by the fact that it consists of surplus notes, which bear some of the traits of debt and some of the characteristics of stock. Hybrid bonds are somewhat controversial in the bond industry because they can be listed either as debt of equity on balance sheets, so that also may be depressing demand.

"Surplus notes are issued mainly by the insurance industry.

"Moreover, the notes will feature a fixed rate until January 2013 and a floating rate after that. The prospect of a floating rate may not be attractive in the current nervous environment."

Of course, this whole process of ratings agencies rating MBIA and its cohorts "AAA" ... and then giving them about 800 years to raise capital, while saying "We really, REALLY mean it this time -- we might downgrade you!" ... is a little silly. I don't know about you, but I'm not familiar with many companies that are truly AAA that have to borrow money at credit card-like interest rates. The market is clearly saying the firm's credit risk is anything but minimal.


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