MBIA just can't seem to get a break these days. Even though the monoline's CDO holdings were credited with its first quarter earnings boost, sector analysts remained cautionary - in some cases suspicious - following last week's positive announcement.

CDO exposure at the financial guarantor totaled $67 billion in net par value as of March 31, and its CDO portfolio posted a gain of $60 million in the first quarter, a significant uptick from the $82 million loss posted last year. According to its release, MBIA expanded its market data sources to avoid undue reliance on any single data vendor. It noted part of the earnings upswing might be attributed to the addition of a new data vendor, which analysts pounced on. Generally tighter spreads in the CDO market were also credited for the gain.

"MBIA's valuation of synthetic CDOs is sensitive to changes in credit spreads and, therefore, the positive mark for the quarter reflects the impact of tighter credit spreads in the investment-grade bond market," the company said in its release.

In a daily brief issued last week, unsecured debt research firm Gimme Credit stated that despite increase in earnings to $223 million from $152 million in 1Q02, it doesn't "view MBIA (Aa2/AA/AA) as currently attractive." Specifically, analyst Kathy Shanley harps on the gain in MBIA's CDO portfolio. "Although the mark-to-market this period was positive, the adjustment raises questions about future earnings volatility," she writes.

Unrealized gains of the mark-to-market process, primarily from synthetic CDOs, were credited with $0.27 of the $1.54 per share dividend. Company management said it foresees no future material losses in either synthetic or cash-funded CDO portfolios. Although the MBIA CDO portfolio consists primarily of senior positions (82% rated triple-A; 3% rated below investment grade), Gimme Credit questions MBIA's loss assumptions.

Shanley notes that MBIA's policy of not paying off insurance obligations immediately - instead paying on scheduled coupon and principal payment dates - skews current loss expectations, she argues. From 1974 through Dec. 31, 2002, MBIA's total incurred losses stood at $401 million, of which $156 million had been paid, and the remaining $245 million in reserves. Shanley speculates this may not be enough given MBIA's exposure to other troubled sectors of structured finance markets, such as aircraft lease and subprime autos as well as public finance debt of bankrupt hospital chain Allegheny Health Education and Research Foundation, which stakes a claim

to a "large portion of the case reserves."

Always controversial, Shanley sees the rating agencies as having a symbiotic relationship with insurers of ABS, MBS and CDOs. "Based on its track record to date, we don't have a basis for rating MBIA lower than the rating agency assessments, but we believe the relationship between the agencies and MBIA is semi-incestuous since all benefit from the growth and stability of the structured finance sector," she writes.

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