Friday, December 7, 2012

Is Bank of America Looking to Round Up Some MBIA Wampum?

Why did Bank of America (BAC) recently extend its tender offer for MBIA's 5.7% notes until 12/11, and eliminate the two conditions that would excuse BAC from purchasing notes after a successful note consent solicitation by MBIA?

These two conditions were "there having been validly tendered pursuant to the Tender Offer and not validly withdrawn, not less than a majority in aggregate principal amount of the [MBIA  5.7% Notes] outstanding,” and that “MBIA shall not have obtained the requisite consent of [noteholders] needed to validly approve the [amendments eliminating cross-default to the securitization insurance subsidiary (Securitization Sub), and those amendments] shall not have become effective."

One can understand that BAC might want to extend its tender offer if it had developed some litigation theory against MBIA which required that BAC maintain an open tender offer in order to pursue the claim.  I am not aware of what that theory might be, but it is a plausible explanation.  But BAC could have extended its tender offer for this purpose without removing these conditions.  Indeed, one would remove these conditions only if one wanted to buy any and all tendered notes irrespective of the success of the MBIA note consent solicitation.

Now, BAC can always terminate the tender offer before 12/11 without any obligation to purchase notes, so BAC has not irrevocably committed itself to buying MBIA notes.  But still, one is left searching for a plausible reason why BAC would want to put itself in the position of being potentially obligated to buy MBIA notes after their cross-default provision to Securitization Sub has been eliminated. 

Mark Palmer at BTIG Research has provided us one such plausible reason.  In his latest research note on MBIA, http://www.btigresearch.com/2012/12/06/mbia-additional-possible-reasons-why-bofa-is-persisting-with-cash-tender-offer-for-5-7-notes/#ixzz2EO2hjJdq, Palmer points out that when BAC settled with Syncora, BAC provided Syncora a mix of consideration, including cash and other assets, and securities of Syncora, ostensibly in order to confound anyone (such as other plaintiffs and potential plaintiffs in fraud actions against BAC) from being able to determine with certainty what was the precise aggregate consideration BAC paid Syncora in settlment of Syncora's fraud suit against BAC.

Palmer speculates that BAC might be similarly putting itself in a position to settle with MBIA with a similar mixed bag of consideration, consisting of cash, other assets (ostensibly, the commutation of BAC's cmbs cds), and MBIA securities.  Palmer says this:  "What does this [the mix of consideration in the Syncora settlement] have to do with BAC’s decision to push forward with its cash tender? We believe that by adding the 5.7% notes to its various other exposures to MBIA, BAC could at the time of a settlement with the bond insurer be able to similarly muddle the math done by those trying to figure out what portion of its exposure that it had paid out. The bank could thereby better position itself to minimize the amount it will pay out to the many other parties suing it over representation and warranty breaches."  As well, if BAC pays 95% in its tender offer and gets credit for 100% of the notes by MBIA, there is a 5% vig that BAC earns to boot.

Or, as Yogi Berra might put it in an insurance company television commercial, BAC may be beginning to load up on things that are not money but are as good as money to MBIA.  What I would call wampum...items having trading value to MBIA, but whose precise value will not necessarily be disclosed with itemized specificity in the public announcement of any settlement.  Indeed, just like all of the previous commutations of cmbs cds that MBIA executed with former co-plaintiffs with BAC in the Article 78, one would expect that any commutation of BAC's cmbs cds would not have a value assigned to it.

This is all speculation, of course, but it offers a plausible reason why BAC eliminated its two principal conditions to its tender offer when BAC extended it.  And this is the first plausible reason I have been able to come up...apart from the notion that BAC is just trying to mess with the heads of MBIA longs.

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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