In a move to enhance bondholder protection and write new business, MBIA is separating its municipal bond insurance business from structured finance and other businesses unrelated to public finance.
MBIA’s high-quality insured portfolio, once rated “AAA,” has faced rating downgrades over the last year as the bond insurer’s exposure to the deteriorating sub-prime mortgage market dragged the company’s prospects lower. MBIA, with this announcement, has reaffirmed its commitment to its traditional municipal bond insurance business and its plans to once again write new policies.
Separate subsidiary
Under MBIA’s major new restructuring plan, its existing municipal bond insurance business and portfolio of existing insured bonds has been transferred to a separate subsidiary, MBIA Insurance Corp. of Illinois. MBIA plans to rename the company “National Public Finance Guarantee Corporation” (National).
“It is MBIA’s intention to operate National as a separate operating and legal entity that will have no exposure to the structured finance business,” said Jay Brown, MBIA’s CEO. Eric Dinallo, New York’s insurance superintendent, supervised the reorganization.
MBIA’s existing book of business, including FGIC’s reinsured portfolio obligations, was transferred to National on January 1, 2009, through a “cut through” process whereby bondholders may apply for claims directly to National. To support the $537 billion portfolio, MBIA paid $2.89 billion to National as a premium and $2.09 billion of additional funds. Additionally, the existing public finance staff and resources will be assigned to the new unit. MBIA has promised to not use credit derivatives to guarantee new insurance transactions and will seek to raise further capital.
Once considered the premier “AAA”-rated bond insurer, MBIA’s structured finance business turned sour due to its exposure to the sub-prime mortgage crisis, causing the company’s credit ratings to be downgraded by all three rating agencies.
In reaction to MBIA’s announcement, Standard & Poor’s adjusted National’s rating to “AA-” from “AA” with developing implications. S&P indicated the new muni bond entity could see its rating raised if the “ring fencing” of the municipal business is successful, business prospects improve and additional capital is raised. S&P noted it would likely keep MBIA within the “AA” category.
Moody’s responded by placing National on review for possible upgrade.