I’ve been trying to put finger to keyboard on this for a few days but lack the technical legal background to give justice. I recently came across this post and after researching, have found it accurately depicts what MBIA Inc. (NYSE:MBI) could now do post Consent Solicitation success. MBIA is an easy double with the below scenario and more if they get an advantageous settlement from Bank of America Corp (NYSE:BAC). Now, I’m not as sanguine on Bank of America Corp (NYSE:BAC) as the author as I think there is much more value in MBIA Inc. (NYSE:MBI) as a whole than without MBIA Insurance (referred to as Securitization sub below).
So, while it is a good sized leg up in settlement talks for MBIA, it is in no way a knife to the heart of Bank of America Corp (NYSE:BAC) as both sides still need a settlement.
The main point here is that when we are looking at MBIA now, post Solicitation, the main question we have to ask is: “so is this worth $20 or $30?”
Reprinted with permission from MBIA BAC Litigation
MBIA announced this morning that it had successfully completed its consent solicitation and that it had amended the indentures for all of its outstanding public debt, so that a rehabilitation proceeding involving MBIA Insurance (Securitization Sub) would not create a default under MBIA’s public debt.
I have discussed a mail the keys to Securitization Sub scenario here, whereby MBIA can substantially improve its negotiating position, and substantially worsen Bank of America’s (BAC) negotiating position, with regard to settling their fraud and Article 78 litigation by threatening to invite the New York Department of Financial Services (NYDFS) to take over Securitization Sub and place it into rehabilitation.
The only event that now needs to take place before MBIA can embark on the mail the keys scenario is for Justice Kapnick to render her decision in the Article 78 proceeding brought by BAC, and for that decision to be adverse to BAC.
Or does Justice Kapnick even have to announce her decision before MBIA mails the keys, after all?
We already know that MBIA and BAC each expect Justice Kapnick to render the Article 78 decision in favor of MBIA and NYDFS. BAC was willing to buy $170 million of MBIA notes at a 20% premium to their trading value to frustrate the MBIA consent solicitation. Would BAC do this if it believed it would win the Article 78? Likewise, MBIA just spent $170 million in repurchasing these notes at a premium after it first received consents from the sellers. Would MBIA do this if it thought it would lose the Article 78?
(As a side note, given the litigiousness of BAC, one might expect BAC will bring some action claiming that MBIA either conducted an illegal tender offer, or made material misrepresentations in its consent solicitation materials (BAC might need to round up a noteholder to assert these claims, as it is not clear how BAC has standing to assert these claims). Any such action is going to fail, as MBIA was dealing with institutional investors and knew where the bonds were. It did not need to conduct a tender offer to find the bonds, and the noteholders knew how to protect themselves when they read in the consent solicitation materials that MBIA might buy bonds during the pendency of the solicitation.)
(As another side note, shame on BAC for faulty due diligence. Why wasn’t BAC aware, before MBIA announced its consent solicitation, that it could put the squeeze on MBIA if it had bought up half of the 5.7% notes before hand. BAC’s whole litigation strategy has been to delay the litigation long enough to push MBIA into a liquidity squeeze in order to obtain a favorable settlement. Buying a blocking position of the 5.7% notes should have been the first thing they did in pursuing this strategy. Well, this is the same BAC that thought it had done careful due diligence in connection with the Countrywide acquisition.)
So, how can one expect BAC and MBIA to view their settlement positions post-consent solicitation? First, one can posit that the reason that no settlement has been reached to date is because MBIA wants too much (in BAC’s view) to settle its fraud action against BAC, and BAC wants too much (in MBIA’s view) to commute (or collateralize) its cmbs credit default swaps (cds) that MBIA issued to BAC.
How would a rehabilitation of Securitization Sub affect this settlement dynamic, given that MBIA has successfully completed its consent solicitation and both parties expect the Article 78 action to be decided adverse to BAC?
BAC indicates in its latest 10Q that it carries cmbs cds from a monoline counterparty at $1.35 billion; let’s assume this refers to the MBIA cds. BAC is likely seeking at least this amount in a settlement with MBIA, in order to avoid recognizing a loss.
These cmbs cds are derivative contracts, not financial guaranty insurance policies. While cds accomplish the same objective as financial guaranty insurance, they are not treated as insurance policies for insurance regulatory purposes, and there is every reason to believe that the NYDFS