Tuesday, November 13, 2012

MBIA v Bank of America Litigation Goes Corporate (and Hostile)

Bank of America (BAC) has just launched a tender offer for approximately $329 million of MBIA notes due 2034.  The purpose of this solicitation is to frustrate MBIA's consent solicitation of holders of all public MBIA debt to amend their indentures to prevent a default by MBIA Insurance (Securitization Sub) from constituting a cross default under MBIA's public debt.

In other words, if MBIA is able to win the Article 78 proceeding (now sitting in Justice Kapnick's decisional lap for the past 5 months), MBIA could theoretically (and euphemistically) mail the keys to Securitiziation Sub to the New York Department of Financial Services (NYDFS).  NYDFS would put Securitiztion Sub in rehabilitation and likely (i) continue the fraud and putback litigation with respect to which MBIA is nearing trial against BAC, and (ii) create a payment plan outlining how claimants (such as BAC) would get paid as funds become available to Securitization Sub.  This "mail the keys" scenario creates substantial additional risk for BAC.

If MBIA were to do this after obtaining the necessary debt consents, MBIA, the holding company for Securitization Sub and National Finance (Public Finance Sub), would not be in default under its holding company debt and would continue to own and operate Public Finance Sub.  Financial commentators have stated that MBIA is worth over $20/share, taking into account only the value of Public Finance Sub.

This ability of MBIA to mail the Securitization Sub keys after a win in the Article 78 case would appear to be primarily a negotiating tactic.  MBIA would appear to be leaving meaningful value on the table at Securitization Sub by using this strategy, and it would still be at risk to receive back repayment of Public Finance Sub's secured $1.6 billion loan to Securitization Sub.  Of course, apart from MBIA's desires, the NYDFS could always come in and take over Securitization Sub under its insurance regulatory powers...although MBIA has stated in its most recent earnings call that MBIA's debt consent solicitation is not being undertaken in view of any sense that the NYDFS was about to do this.  So, in addition to negotiating tactics, MBIA is also seeking to preserve the company ex-Securitzation Sub in the event of an undesired NYDFS takeover by conducting its consent solicitation.

And so, BAC has replied with its own negotiating tactic, deciding to spend as much as $329 million (and at least $165 million to buy 50% of the notes under their early tender pricing) to deny MBIA from being able to employ its negotiating tactic.  Suddenly, the stakes involved in improving negotiation posture have been raised.

MBIA has several strategies available to counteract BAC's debt tender offer.  The $329 million 2034 notes that are the subject of BAC's tender offer can be prepaid at any time, at par plus the present value of future payments discounted at the current treasury rate of a comparable maturity plus 15 basis points (which, of course, is quite low and therefore this "make-whole" provision would be expensive).  So, MBIA could issue new notes in a private placement (having default provisions that would not be triggered by a Securitization Sub default) and redeem the 2034 notes even if BAC purchases them all.  This private placement can be closed in a week.  It will cost MBIA more than the debt cost for the 2034 notes, of course, but the point is that BAC's tender offer, if successful, does not prevent MBIA from pursuing its strategy.  It would just make it more costly.

MBIA could also go into the market and buy 2034 notes.  Any such notes bought by MBIA would not be deemed "outstanding" for purposes of its own debt consent solicitation, but it would lessen the amount of notes that would have to be bought by "friends of the family" in order to block the BAC tender offer strategy (and, of course, any 2034 notes MBIA bought in the market would lessen its prepayment cost).  As well, MBIA could conduct an exchange offer with holders of its 2034 notes, offering new notes without a cross default provision, and likely a higher interest rate and some cash, in exchange for the 2034 notes.

Finally, if indeed the consent solicitation is only a negotiating tactic and MBIA has multiple other paths to ensure sufficient liquidity at Securitization Sub to permit it to pursue its litigation with BAC to the end, MBIA could simply terminate its consent solicitation and pursue those other, likely more costly, strategies.  While terminating the consent solicitation may be difficult for MBIA to swallow, it would signal to the markets (and BAC) MBIA's belief that it is not exposed in the near and medium term to a NYDFS takeover of Securitization Sub.

Of course, MBA could also file a motion for a temporary restraining order (TRO) while it implements its corporate response strategy; while obtaining a TRO is not likely to be successful, seeking such a TRO would be considered good form in the world of hostile corporate transactions.

It now seems that the tail is wagging the dog, as if the decisionmakers at both MBIA and BAC are more interested in looking smart than astutely managing risk/reward. I am beginning to think that if Dickens were still writing, he would have a field day with all of this.

NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and own their own work, because you will certainly own your investments.

Disclosure: long MBI.  Follow me on twitter.

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