MBIA's shares traded higher last week on the announcement of Warburg Pincus' infusion of up to $1 billion of additional capital into the monoline insurer. MBIA sought the new capital to maintain its triple-A rating and to cushion loss expectations on its RMBS portfolio.
Warburg Pincus will inject $1.0 billion of capital via new equity. The global private equity firm will buy 16.1 million shares at $31 per share to raise an initial $500 million of new equity, with a no-sale period of three years. An additional $500 million will come from a rights issue underwritten by Warburg Pincus that is scheduled for next year. MBIA will also receive 8.7 million warrants at $40 per unit and have the right to appoint two directors to the board.
The announcement comes after Moody's Investors Service said earlier in the week that there is a strong likelihood that losses on mortgage securities might cause MBIA to experience a capital shortfall. This has increased MBIA's need to raise capital from "unlikely" to "moderate risk." MBIA said that it had been pursuing capital contingency plans anyway, even without these rating agency requirements. The monoline insurer's mark-to-market losses will be higher in the fourth quarter, and it expects to create a reserve fund of $500 million to $800 million to cover subprime exposures. MBIA added that it had other options available to raise further equity.
Market sources said other options the insurer might consider include ceasing new business for a short period and relying on existing revenue streams, which would allow some of its insured securities to mature.
Societe Generale analysts said they believe MBIA might be able to raise capital to cover its subprime exposure, but if the economy falls into a recession, it could prove harder to maintain its ratings. Losing the triple-A rating would endanger MBIA's ability to guarantee debt, which is its main source of revenue.
"Downgrade of the major monoline insurers would significantly impact many markets and likely cause the monoline business models to change significantly or even wind down for some asset classes," said SocGen analysts.
As the pressure on the monolines mounts, CDS spreads have moved as wide as 450 basis points from around 15 basis points. Financial guarantor FSA, which has the lowest concentration of subprime exposure, has widened the least, while AMBAC and MBIA spreads reflect their somewhat riskier portfolios.
With the SIV industry having an average 8% exposure to the insurance sector, it is poised to face mark-to-market losses in the event of a downgrade, SocGen analysts said. Other causalities will be among municipal bond investors, where most deals carry a monoline wrap. Banks also have a high exposure to monoline insurers. Because of the high ratings resulting from having a deal wrapped, required capital is much lower. "Any downgrade might require a modest element of increased capital held against this exposure by the banks," explained analysts at SocGen. "The most likely loss would be from mark-to-market; however, they are probably contained within hold-to-maturity portfolios."
Rating agencies will continue to review bond insurers to assess their exposure to subprime mortgages. Moody's reported that it expected to complete its review within two weeks. The agency's previous model required these companies to hold at least $13 billion in capital. Fitch Ratings is also examining its approach that currently involves analyzing the underlying credits for possible rating downgrades.
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