Saturday, 9 February 2008

MBIA Screws Shareholders To Retain Credit Rating

MBIA Raises $1 Billion at a Discount to Lure Buyers

MBIA Inc., the world's biggest bond insurer, sold $1 billion in stock at below-market prices to lure buyers and shore up capital to maintain its AAA insurance rating.

The 82.3 million shares were sold at $12.15 each, 14 percent less than Armonk, New York-based MBIA's $14.20 closing price, according to a statement yesterday. Private-equity firm Warburg Pincus LLC bought $300 million of the stock, MBIA said.

Offering a discount enabled MBIA to increase the sale from a planned $750 million and may give the company the cushion it needs to convince ratings companies it can weather losses from subprime-mortgage securities. MBIA, with a market capitalization of about $1.7 billion, has raised $2.5 billion since November to stave off downgrades that would cripple its ability to insure debt and throw doubt on the ratings of $678 billion of securities the company guarantees.

``MBIA bought itself some time,'' said Peter Plaut, an analyst at hedge fund manager Sanno Point Capital Management in New York. ``It's positive that they found a market clearing price, though it doesn't prevent further downgrades'' if losses rise, he said.

So let's get this straight. Here is a company that on 31st October had 125 million shares. They subsequently suckered Warburg Pincus into paying $31 a share for around 16 million shares. Now just a couple of months later they are issuing a further 82 million shares at $12.15.

That is a massive dilution to existing shareholders and it is doubtful they will ever recoup their losses. However it seems the company had little choice. It is either that or file for chapter 11 which may turn out to have been the best option rather than wasting billions trying stay afloat.

That this company has been able to retain it's AAA credit rating to date is beyond a joke. However, as the article above states, the latest round of capital injections does not guarantee that the company will retain it's AAA rating.

In Throwing good Money After Bad I noted Bank of America's decision to double down on dumb investment decisions. Warburg Pincus looks like they want to try and top them.

They thought MBIA was a good investment $31 so I guess $12.15 screams absolute bargain to them. Or just maybe it was never worth $31? You hear much talk on Wall Street about what the so called 'smart money' is up to. However it is sometimes more instructive to pay attention to what the dumb money is doing.


Glen said...

Well... it takes idiots, and idiot institutions for us to be able to beat the market. ROFLMAO.

The Fundamental Analyst said...

What I find funny is the assumption that institutions like B of A know what they are doing because ....well, they are B of A. Warburg Pincus must have egg all over their face too. Microsoft is paying far too much for Yahoo and now it looks likely they may have to up the already over priced offer even more.

BHP keeps upping the ante for RIO, the strategy there seems to be, let's buy growth at any cost.

If Buffet starts buying the monoline insurers I'll have no problems with people saying the smart money is buying.