MBIA (MBI) Updates on Letter of Default from Blue Ridge in Notes Tender

December 17, 2012 5:31 PM EST Send to a Friend
On December 13, 2012, MBIA (NYSE: MBI) received a letter from Blue Ridge Investments, L.L.C. addressed to the Company and The Bank of New York Mellon Corporation (NYSE: BK) in its capacity as the trustee under the Senior Indenture, dated as of November 24, 2004, by and between MBIA and The Bank of New York (as supplemented by the First Supplemental Indenture, dated as of November 24, 2004, and the Second Supplemental Indenture, dated as of November 21, 2012, governing MBIA’s $329 million principal amount of Senior Notes. The letter purports to be a “Notice of Default” under Section 501(3) of the Indenture (the “Purported Notice of Default”) and alleges that the Second Supplemental Indenture was executed without the requisite consent of holders of the Senior Notes required by the Indenture. A copy of the Purported Notice of Default is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Pursuant to the Indenture, if the default alleged in the Purported Notice of Default continues for a period of 60 days after notice, then the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Senior Notes may declare the principal amount of the Senior Notes to be due and payable immediately. As previously disclosed, MBIA owns approximately $170 million principal amount of the Senior Notes.

In addition, pursuant to the Indenture, dated as of August 1, 1990, by and between MBIA and The First National Bank of Chicago, as trustee (as supplemented and amended, the “1990 Indenture”), governing the Company’s 6.40% Senior Notes due 2022, 7.00% Debentures due 2025, 7.15% Debentures due 2027 and 6.625% Debentures due 2028 (collectively, the “1990 Securities”), any acceleration of the amount due under the Senior Indenture that is not discharged or cured, waived, rescinded or annulled within 10 days after notice from the trustee of the 1990 Indenture or holders of not less than 25% aggregate principal amount of the 1990 Notes (treated as one class) would constitute an Event of Default under the 1990 Indenture and either the trustee of the 1990 Indenture or the holders of not less than 25% in aggregate principal amount of the 1990 Securities then outstanding (treated as one class) may declare the entire principal of the 1990 Debt Securities then outstanding and interest accrued thereon to be due and payable immediately.

On December 17, 2012, the Company sent the Trustee a letter advising the Trustee that the Purported Notice of Default is meritless and has no force and effect under the Indenture, directing the Trustee to take no action in furtherance of the Purported Notice of Default, and advising the Trustee that the Company intends to take any and all necessary and appropriate actions to enforce the Second Supplemental Indenture. A copy of the Company’s letter to the Trustee is attached hereto as Exhibit 99.2 and is incorporated herein by reference.

On December 13, 2012, Bank of America Corporation (NYSE: BAC) filed suit in the Supreme Court of the State of New York, County of Westchester against MBIA and The Bank of New York Mellon alleging that MBIA tortiously interfered with BoA’s tender offer to buy all of the Senior Notes and seeking a permanent injunction against the implementation of the Second Supplemental Indenture and money damages. Based on currently available information, we believe we have strong defenses and intend to defend against this lawsuit vigorously if and when we are served with process, but the outcome of this matter is inherently uncertain and may be materially adverse.

*** Blue Ridge letter:

December 13, 2012

BY CERTIFIED MAIL

MBIA Inc.
113 King Street
Armonk, New York 10504
Attention: General Counsel

The Bank of New York Mellon Corporation
101 Barclay Street, 21 West
New York, New York 10286
Attention: Corporate Trust Administration

Ladies and Gentlemen:

Reference is made to that certain Senior Indenture, dated as of November 24, 2004, by and between MBIA Inc. (the "Company") and The Bank of New York, as trustee (as supplemented by the First Supplemental Indenture, dated as of November 24, 2004, the "Indenture"). Capitalized terms used, but not otherwise defined, in this letter shall have the meanings ascribed to them in the Indenture. This letter constitutes a "Notice of Default" under Section 501(3) of the Indenture.

Blue Ridge Investments, L.L.C. is the Holder of $135,633,000 in principal amount of the series of Securities entitled 5.70% Senior Notes due 2034 (the "Senior Notes"), representing in excess of 25% in aggregate principal amount of the Outstanding Securities of such series of Senior Notes under the Indenture. This notice is delivered pursuant to Section 501(3) of the Indenture to notify you of a default in the performance by the Company of the covenants under the Indenture described below.

On November 21, 2012, the Company entered into a supplemental indenture purporting to amend the Indenture to change the subsidiary of the Company that would be a "Restricted Subsid iary" (the "Proposed Amendment"). To validly enter into this supplemental indenture, the Indenture requires that the Proposed Amendment receive the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture. The Company commenced a consent solicitation to obtain the requisite consents on November 7, 2012, offering to pay a consent fee of $10.00 for each $1,000 in aggregate principal amount of Senior Notes. However, shortly before the expiration of the consent solicitation, the Company acquired approximately $170,000,000 of Senior Notes at prices significantly higher than the market price.

It is clear that these repurchases were completed with the tacit understanding that the Holder of such Senior Notes consent to the Proposed Amendment. As such (i) these purchases constitute an additional consent payment that was not made available to all Holders, and (ii) given that there was an agreement, arrangement or understanding with respect to the Company's acquisition of the Senior Notes, the Company had beneficial ownership of the Senior Notes at the time that the consent was obtained.

The payment of a consent fee to some Holders in a manner that does not make such fee available to all Holders is a violation of the implied covenant of good faith and fair dealing, as MBIA paid this higher consent fee to only a select few. Not only do the Company's actions with respect to the Proposed Amendment constitute a default due to the Company's breach of its implied covenant of good faith and fair dealing, it also invalidates the consents received with respect to the Proposed Amendment.

Furthermore, once the Company obtained beneficial ownership of the Senior Notes, they ceased to be Outstanding Securities for purposes of the Indenture, and the consent received with respect thereto was invalid with respect to any subsequently executed supplemental indenture. The Company's execution of a supplemental indenture without the requisite consent breaches Section 902 of the Indenture and constitutes a default under Section 501(3) of the Indenture.

We hereby require the Company to remedy these breaches within the time period specified in Section 501(3) of the Indenture.

Very truly yours,

/s/ Richard Knaub

Richard Knaub
Senior Vice President



*** MBIA Letter:

December 17, 2012

BY CERTIFIED MAIL

The Bank of New York Mellon Corporation
101 Barclay Street, 21 West
New York, New York 10286
Attention: Corporate Trust Administration

Senior Indenture, dated as of November 24, 2004,
by and between MBIA Inc. and The Bank of New York

Ladies and Gentlemen:

On December 13, 2012, MBIA Inc. (“MBIA” or the “Company”) received a letter from Blue Ridge Investments, L.L.C. addressed to the Company and The Bank of New York Mellon Corporation (the “Trustee”) in its capacity as the trustee under the Senior Indenture, dated as of November 24, 2004, by and between MBIA and The Bank of New York (as supplemented by the First Supplemental Indenture, dated as of November 24, 2004, and the Second Supplemental Indenture, dated as of November 21, 2012 (the “Second Supplemental Indenture”) (collectively, the “Indenture”)), governing MBIA’s 5.70% Senior Notes due 2034 (the “Senior Notes”). The letter purports to be a “Notice of Default” under Section 501(3) of the Indenture (the “Purported Notice of Default”).

The Purported Notice of Default is meritless and has no force and effect under the Indenture. All consents necessary for the Company’s and the Trustee’s entry into the Second Supplemental Indenture were validly obtained from a majority of the holders of record of the Senior Notes as of 5:00 p.m. on November 6, 2012, the record date established for the consents, and all other conditions precedent for the entry into the Second Supplemental Indenture under the terms of the Indenture were satisfied. The entry into the Second Supplemental Indenture did not breach or violate any term or covenant, express or implied, of the Indenture whatsoever. Consequently, the Second Supplemental Indenture is valid, binding and enforceable.

Accordingly, the Company directs the Trustee to take no action in furtherance of the Purported Notice of Default and advises the Trustee that it intends to take any and all necessary and appropriate actions to enforce the Second Supplemental Indenture.

Very truly yours,
/s/ Ram D. Wertheim

Ram D. Wertheim
Chief Legal Officer

cc: Blue Ridge Investments, L.L.C.
214 N Tyron St.
Charlotte, NC 28255


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