MBIA Earnings Call Insights: Surplus Notes and Debt Timeline

MBIA Inc (NYSE:MBI) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Surplus Notes

Geoffrey Dunn – Dowling & Partners: Thank you. Congratulations on such a big step forward this quarter. I guess, first, can you give us an update on your thoughts on the surplus notes and how you hope you can proceed going forward, call it, next year or two?

Jay Brown – Chief Executive Officer: Sure. I think when you look at the surplus notes, you really have to think about the situation in MBIA Corp. first. In that regard and as Chuck went through the balance sheet, the isolated number of areas that have significant potential volatility still remaining in the portfolio. We also have a substantial collection of recoverables that totals in excess of $1 billion. My sense of that is that payments to the surplus notes in terms of interest probably will not occur until those sources of volatility are removed and collection of those recoverable occurs. We have indicated to the market that we would be happy to engage in any conversation to exchange surplus notes for other securities, but at time, Geoff, the way the market has priced the surplus notes, in our mind makes it impossible for us to make a rational economic decision to trade them for another security. If there is an adjustment in the prices of securities, we’d be happy to engage in those conversations, but the levels that they exist today, which the surplus notes, the last time I looked were trading in the 85 range for those few that actually trade. At those price levels, we can’t make the numbers work in exchanging them for any other security at our holding company whether it’s debt or equity.

Geoffrey Dunn – Dowling & Partners: Can you update us on where the Credit Suisse efforts currently stand with respect to the R&W?

Jay Brown – Chief Executive Officer: We’re going through the discovery process, the particular courtroom we are in, in New York has been slower than some of the other cases that we’ve been able to proceed on. At this point in time, it’s highly unlikely that we would get a full trial date until towards the end of 2014 or early 2015. I think as other participants in the market have indicated, Credit Suisse has not participated heavily in any negotiated settlements with any of their counterparties on the RMBS, R&W claims. So at this point, we expect that’s going to be growing out probably for another couple of years unless there is a change in their view on the case…

Geoffrey Dunn – Dowling & Partners: Then my last question, can you talk a little bit about the initial response from the market with National’s efforts to relaunch? Is there interest in the A level or is it really needs to be a AA platform and is there any kind of legacy worry or are people clearly viewing National as a complete separate entity?

William C. Fallon – President and COO: Jeff, it’s Bill speaking. The reaction actually has been quite favorable. Even at the current ratings, we are getting interest and there have been people who have assets to wrap certain bonds. There aren’t any that we have done yet, but we continue to get inquiries on that front. As Jay mentioned in his comments, we think the capital level of National is very strong, and as Chuck mentioned, we are starting the process, engaging with the rating agency. So we’re quite optimistic about where the ratings are headed directionally and with regard to the reception and the reaction in the marketplace, both from issuers and investors as well as other intermediary things, banks, financial advisor. So we think we have a very optimistic outlook there.

 

Debt Timeline

Arun Kumar – JPMorgan: Couple of quick questions to you. Earlier in the commentary, you mentioned recapitalization of the holding company, potential issuance of equity and other debt. Could you, one, talk about what kind of timeline you may be considering? Secondly, number two, if you maybe do that successfully, what could be the use of those proceeds other than some of the holding company liquidity issues that you mentioned? Would you be attempting to recapitalize the opco or potentially at some point down the road revisit what you’re going to be doing with the surplus notes, considering that they are a big drain on your capital at this point?

Jay Brown – Chief Executive Officer: Let me answer that and then Chuck can come back (in little bit). In terms of timeframes, we’re most focused right now in dealing with the rating agencies and getting their thoughts on what’s necessary to get National to a higher rating level. In terms of that process, I would expect that’s a three to six month process based on how long it’s taken us in the past. We do not need, I want to be very clear on this. We do not need to retire any debt ahead of schedule at this point in time, our forecast suggest that we could just gradually deleverage over the next three or four years and reach our target objectives without raising any equity or issuing any new debt. The only reason to do that would be to reduce some of the higher coupon debt out there and change the relationship between debt and equity. I want to make it also clear that we had no indications, nothing in our internal analysis or anything we’ve heard from the rating agency suggest that any money has to do for international achieve a rating level consistent with what we need in the marketplace. The plans that we have for National include paying dividends over the next several years including under an assumption of how much business we might write. So the whole focus of that exercise is whether it make sense, speed up that process, if the prices are right to do that sooner rather than later, but right now there is no set deadline and we’re just working our way through it very carefully in terms of trying to understand the pros and cons of it. In terms of the surplus notes, surplus notes are a drag on the capital of MBIA Corp. period, and that’s where we’re looking at MBIA Corp. at the box and we’re trying to determine, if we were to replace those surplus notes or take them out with something at the holding company, it has to make sense for the holding company shareholders. We’re not going to take them out just to take them out, because they have a high interest coupon on them.

C. Edward Chaplin – President, Chief Administrative Officer and Chief Financial Officer: You just have to keep in mind that the surplus notes are not in the same category as the holding company senior debt and the MTNs that we’ve discussed because of their hybrid nature. So they are currently acting as equity in the insurance company capital structure. So we just got to consider it in that light.

Arun Kumar – JPMorgan: Just a quick question on National. I think you mentioned they were going to be paying dividends to the holding company sometime soon, but correct me if I’m wrong, but I thought I head you say at the end of the fourth quarter of this year?

C. Edward Chaplin – President, Chief Administrative Officer and Chief Financial Officer: No, I think I said that we expect in the fourth quarter. So may be as soon as October is our expectation.

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