A global settlement between MBIA and Bank of America is positive for MBIA-wrapped non-agency mortgage-backed securities, according to Barclays.
In a note published today, Barclays analysts said the deal "removes the likelihood of a near-term liquidity event at MBIA Corp."
On Monday, BofA announced that the two parties have resolved MBIA’s rep and warranty lawsuit against BofA as well as BofA’s restructuring lawsuit against MBIA.
As part of the settlement MBIA has agreed to end its rep and warranty lawsuit against Countrywide and Bank of America and issue warrants to Bank of America to purchase about 5% of MBIA common stock at $9.59.
In return, BofA will pay $1.6 billion of cash and transfer $137 million of unsecured MBIA Inc. notes to MBIA Corp. It will also provide a $500 million line of credit to MBIA Corp and terminate all outstanding credit default swaps purchased from MBIA Corp.
The ongoing litigation had been draining liquidity from MBIA's structured finance unit, threatening to land it in an insurance receivership; this would have suspended claim payments by MBIA on its structure finance obligations for some time.
Barclays calculated that the 15 Countrywide securitizations included in the rep and warranty lawsuit brought by MBIA have $4.3 billion of outstanding, unreimbursed claims owed to the insurer as of April 2013.
These securitizations would have “experienced about another $500 million in claim payments, bringing total losses to MBIA on the 15 securitizations to approximately $4.8 billion,” the analysts wrote.
"We believe that the addition of the senior secured credit line and the commutation of a substantial amount of MBIA’s CMBS exposure will provide MBIA Corp with enough liquidity to avoid rehabilitation for at least a few more years," they said.
Barclays said BofA has already absorbed the cost of the settlement through a charge to first quarter 2013 earnings, so it “will have no effect” on the bank’s future financial performance.
“MBIA’s legal claims were likely the largest remaining legacy hurdle for [BofA] beyond the pending $8.5 billion Countrywide trust settlement,” said Barclays.
Another positive for BofA that may result from the ruling is that it could set a precedent for some of the other, smaller rep & warranty claims currently being litigated against the bank.
The impact on MBIA-wrapped non-agency securities will vary by sector and deal, but analysts at Barclays said it is likely to increase yield on these bonds by 100 basis points to 300 basis points, across all deals, relative to their yields absent a settlement.