End of the Bond Market Is (Probably) Not at Hand
A delayed disclosure by one of the largest bond insurers has rattled the market.
MBIA, which, along with rival Ambac Financial Group, insures more than $1 trillion in securities, yesterday admitted to an $8.1 billion exposure to the riskiest types of mortgage-backed bonds. Having already received a negative outlook from Moody's Investors Service and Standard & Poor's and a downgrade watch from Fitch Ratings, MBIA could lose its triple-A standing, igniting a repricing of all the bonds that it insures and potentially toppling the industry, experts say.
"It would be disastrous if it was downgraded," the chief economist at Wachovia Securities, John Silvia, said. "You can't really do that business if you got downgraded, so they must seek new capital."
MBIA disclosed on its Web site an $8.1 billion exposure to collateralized debt obligations — or securities that are made up of pools of bonds and other loans — backed by other CDOs and mortgages. Some analysts consider such CDOs, also known as CDO-squared, to be the riskiest part of an investment portfolio. MBIA also said it had $30.6 billion of overall exposure to complex mortgage securities.
MBIA shares plummeted on the news, to $18.84 a share — its biggest one-day decline and the lowest level the stock has seen since January 1995. Shares ended the day down 26%, at $19.95 a share.
News of the exposure evoked ire from several analysts, who were miffed that MBIA had not disclosed its exposure earlier.
"We are shocked that management withheld this information for as long as it did," two analysts at Morgan Stanley, Ken Zerbe and Yoana Koleva, wrote in a note to investors. "MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors." The analysts also called the CDO-squared exposure "massive."
An analyst at Credit Sights, Robert Haines, wrote in a research note that "our degree of confidence has been significantly eroded by recent developments." He also said the belated disclosure "damages our confidence in how upfront this company has been with investors regarding its risk profile."
MBIA did not return calls for comment.
Earlier this month, MBIA announced that private equity firm Warburg Pincus would invest up to $1 billion in the bond insurer. It wasn't clear yesterday whether the deal could be upended by news of MBIA's exposure to CDO-squared securities.
Mr. Haines, pointing to MBIA's 8-k filing, said the transaction with Warburg Pincus did not include a material adverse change clause, whereby the deal would be nullified if there were a dramatic alteration to the company. There was also no requirement that MBIA maintain its current rating.
"Theoretically, there could be some legal wiggle room, but we would tend to think Warburg is still committed," Mr. Haines wrote.
Warburg Pincus didn't return calls seeking comment.
While the deal may still go through with Warburg Pincus, the bad news kept piling on for MBIA yesterday. In addition to negative outlooks from Moody's and S&P, Fitch Ratings warned that it might cut the company's triple-A rating to double-A+ if the company does not boost its capital over the next four to six weeks.
"We have affirmed its triple-A rating, but looking into the future, we do have some concerns in this sector that could have implications for these companies," a managing director at S&P who is a practice leader for the global bond insurance group, Howard Mischel, said of MBIA. "If the market materially worsens, and they are unable to raise the capital, or obtain more reinsurance, then at the end of the day, there is the potential for a ratings change."
MBIA is not the only bond insurer that is finding itself swept up by the subprime mortgage crisis. Earlier this week, ratings agencies assigned negative outlooks and possible downgrades to XL Capital Assurance, Financial Guaranty Insurance, and CIFG.
"This is very worrisome because it does suggest when we look at the overall flow and credit quality in the marketplace, there is a lot that still needs to be done," Mr. Silvia said.
