BofA (BAC) May Have Back Against the Wall in MBIA (MBI) Case - Analyst

March 25, 2013 11:08 AM EDT
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Price: $11.46 +0.53%

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MKM Partners reiterated its Buy rating and $18 price target on MBIA Inc. (NYSE: MBI) Monday, saying Bank of America (NYSE: BAC) may finally have its back against the wall with the only reasonable outcome being a settlement.

MKM analyst Harry Fong said there is little doubt that legacy structured finance unit, MBIA Insurance Corp, will be taken over by the NYDFS if it does not secure an economic settlement with Bank of America. However, it should be noted that this take over does not affect MBIA Inc.'s common shareholders or its senior debt holders.

"We have noted in other reports that a takeover of Corp may not necessarily be beneficial for BAC, as its CMBS wraps were written on a "CDS insurance form" and not on a "financial guaranty insurance" form," Fong comments. "It is believed that insurance regulators may view an "insurance" contract as senior to a "CDS" contract. Now, we are even more certain that, if BAC or any other CDS insurance holder “pushes” MBIA Corp into rehabilitation, there is a very high likelihood that BAC will recover significantly less, if anything, on its MBIA-wrapped CMBS exposures than it could secure if it entered into a negotiated settlement."

The analyst also noted that MBIA added a new risk factor in its recent 10-K filing. It reads: "CDS counterparties may seek to terminate CDS contracts insured by MBIA Insurance Corporation and make market-based damage claims (irrespective of whether actual credit-related losses are expected under the underlying exposure), which claims could aggregate to $7.0 billion or more. The company believes such an acceleration would likely eliminate any residual value in MBIA Insurance Corporation."

"This risk factor may have severe consequences for BAC with respect to potential recoveries on its CMBS wraps," Fong notes. "If Corp enters into rehab, BAC's claims may not only be junior to FG policyholders, but may be lumped together with other CDS mark-to-market claims that could amount to over $7.0 billion, even if there is no “real” loss."

For an analyst ratings summary and ratings history on MBIA Inc. click here. For more ratings news on MBIA Inc. click here.

Shares of MBIA Inc. closed at $11.19 yesterday.

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