Monday, March 27, 2023

Puerto Rico Publicity Cleaned Up, Sale Subsequent?

MBIA Inc (MBI) ($680MM market cap) is now a shadow of its former self, previous to the 2007-2009 monetary disaster, MBIA was the main monetary assure insurer within the U.S., the place MBIA would lend out its AAA score to debtors for an upfront price.  This enterprise mannequin in all probability by no means made sense, it assumed the market was persistently mispricing default danger, the price MBIA charged needed to make it economical to remodel a decrease rated bond to the next rated one.

Within the early-to-mid 2000s, MBIA was leveraged over 100 occasions, they assured the well timed cost of principal and curiosity on bonds that had been 100+x that of their fairness, solely a small variety of defaults would blow a gap into their stability sheet.  When the enterprise was first based, MBIA centered on municipal debt by their subsidiary Nationwide Public Finance Assure Corp (“Nationwide”), with the thesis being that even when some municipal bonds weren’t formally backed by taxpayers, there was an implied assure or a authorities entity up the meals chain that might bail out a municipal borrower.  That has largely proved true (minus the current quasi-bankruptcy in Puerto Rico), nonetheless MBIA was grasping and grew into guaranteeing securitized autos (through subsidiary MBIA Corp) previous to the GFC.  MBIA and others (notably AIG Monetary Merchandise) obtained caught, discovering themselves on the hook for beforehand AAA senior tranches of ABS CDOs and subprime-RMBS that went on to undergo materials principal losses.  There was nobody up the chain to bail out a Cayman Islands particular objective car with a P.O. field as a company handle.  Rather a lot has occurred within the 15 years since 2008, MBIA Corp stopped writing new enterprise virtually instantly, Nationwide continued to jot down new enterprise on municipal issuance however stopped in 2017 after Puerto Rico went additional into misery, Nationwide had important publicity to island.  The enterprise has been in full runoff since then.  

The excellence between Nationwide (municipal bonds) and MBIA Corp (asset backed securities) is vital, MBIA Corp and Nationwide are legally separate entities which are non-recourse to the holding firm, MBIA Inc.  MBIA Corp’s fairness is manner out of the cash, fully nugatory to MBIA Inc, the entity is being run for the advantage of its former policyholders.  Nationwide however has optimistic fairness worth, however when consolidated with MBIA Corp on MBIA Inc’s stability sheet, ends in an total detrimental ebook worth.  However once more, these are two separate insurance coverage firms which are non-recourse to the dad or mum.  The SEC slapped MBIA Inc’s wrist for reporting an adjusted ebook worth primarily based on the belief that MBIA Corp’s detrimental ebook worth was now not related to the dad or mum, as some compromise, MBIA Inc stopped offering the tip consequence, however nonetheless supplies the elements of their adjusted ebook worth (unsure how that is considerably totally different, however no matter).  Listed below are the changes for Q3:

By making these changes, MBI’s adjusted ebook worth is roughly $28.80/share, at the moment it trades for $12.50/share.  The final two gadgets within the adjusted ebook worth bridge are extra runoff-like ideas, these are the values that MBIA Inc would theoretically earn over time because the bonds mature of their funding portfolio and erase any mark-to-market losses (largely pushed by charges final 12 months) after which any unearned premiums assuming their anticipated losses assumptions are correct.

I’ve sort of ignored Puerto Rico, I’ve passively adopted it through the years through Reorg’s podcasts, it’s an excessive amount of to enter right here, however MBIA Inc’s (through Nationwide) publicity is basically remediated at this level (asserting in December that they settled with PREPA, Puerto Rico’s electrical utility that was destroyed in Hurricane Maria), clearing the best way to promote itself.  From the Q3 earnings press launch:

Invoice Fallon, MBIA’s Chief Govt Officer famous, “Given the substantial restructuring of our Puerto Rico credit, we’ve got retained Barclays as an advisor and have been working with them to discover strategic alternate options, together with a potential sale of the corporate.”

Basically all the bond insurance coverage firms have stopped writing new enterprise, the one considered one of any actual measurement remaining available in the market is Assured Warranty (AGO) ($3.7B market cap).  Assured has important overlap with Nationwide that might drive sensible synergies.  Street Insider reported that AGO and another company are in advanced talks with MBIA.  They’re the one true strategic purchaser (perhaps a number of the insurers that bid on runoff operations is perhaps too), AGO additionally trades low cost at roughly 0.75x GAAP ebook worth.  AGO would wish to justify a purchase order to their shareholders that might no less than be on par with repurchasing their very own inventory (which they do always).

In my again of the envelope math, I am solely pulling out the detrimental ebook worth related to MBIA Corp from the adjusted ebook worth, then slapping a 0.75x adjusted ebook worth a number of on it.  Once more, the opposite two gadgets in MBI’s adjusted ebook bridge appear extra like market dangers a purchaser can be assuming and ought to be compensated for bearing the chance of finally attaining.  AGO ought to be capable of justify paying the identical a number of for MBIA Inc since it’ll embrace important synergies.  I provide you with a deal goal worth of roughly $16/share, or 28% upside from at the moment’s costs.

I purchased some shares not too long ago (I do know, one other speculative arb concept!).

Disclosure: I personal shares of MBI

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