MBIA Inc. (NYSE:MBI) reached a settlement with Bank of America (NYSE:BAC) earlier today. We provided some analysis of the news which pushed up shares of MBIA by 45 percent today. Below is a short summary of the various key points in the settlement via Morgan Stanley.
Checking the Box on Lower Litigation Costs w/ MBIA Settlement
Better than expected settlement with MBIA Inc. (NYSE:MBI) significantly reduces tail risk. Bank of America Corp (NYSE:BAC)’s cash payment to MBIA Inc. (NYSE:MBI) of $1.6b is better than the $2b we estimated, and significantly better than the $4b some bearish investors feared. Our thesis on BAC is that declining expenses more than outweighs remaining litigation costs, and today’s settlement with MBIA supports that thesis.
Settlement with MBIA removes risk of precedent setting court ruling on successor liability that could have had negative ramifications for Bank of America Corp (NYSE:BAC)’s consortium settlement.
We think BAC has reserved ~$1b for this, so the incremental $600m is a 3c hit to EPS, but better than the $1b or 6c incremental hit we were modeling. BAC has yet to publish a press release officially announcing the settlement.
What’s new: WSJ/Dow Jones reporting that BAC agreed to a settlement with MBIA Inc. (NYSE:MBI) relating to monocline wrapped RMBS. BAC to pay $1.6b in cash to MBIA and provide MBIA with a $500m credit line. Bank of America Corp (NYSE:BAC) will also take a 5% stake in MBIA Inc. (NYSE:MBI).
What’s next? Approval on consortium settlement on CFC bonds, executing on cost saves & LAS expense cuts, rising HPI.
Overweight Bank of America Corp (NYSE:BAC) as we see accelerating expense cuts more than offsetting remaining litigation risk. Valuation attractive at 0.5x 2014 BVPS vs. our ROE forecast of 7% in 2014 and 9% in 2015.