The nascent comeback of securitization could spell opportunity for MBIA Inc. (NYSE:MBI), notes Mark Palmer in a new research report from BTIG.
This nascent revival looks interesting considering that less than nine months ago, speculation was rampant that MBIA Inc. (NYSE:MBI)’s structured-product insurance unit would be taken over by its regulator.
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MBIA Inc. is the holding company with subsidiaries providing financial guarantee insurance, fixed income asset management, and other specialized financial services.
MBIA Return of securitization
In its recent article, The Economist noted securitization is making a recovery, with issuances of ABSs at double their 2010 nadir. Issuance of paper backed by non-residential mortgages is up from just $4 billion in 2009 to over $100 billion last year. The comeback of securitization is related to the growth in economic activity.
The article points out that excluding residential mortgages, where the American market is skewed by the participation of federal agencies, the amount of bundled-up securities globally is showing a steady rise. The following graph highlights the trends in global securitization.
Regulators’ change of attitude
Mark Palmer believes the reason for change of attitude among regulators could be due to securitization facilitating banks to free up capital without raising it. As noted in the Economist article, policy makers want to get more credit flowing to the economy and are happy to rehabilitate once-suspect financial practices to get there.
Mark Palmer believes if securitization picks up in earnest, MBIA Inc. (NYSE:MBI) would be a natural candidate to provide insurance on newly issued instruments. However, this would require MBI to de-risk MBIA Insurance Corp. He notes such a scenario could create an equity-value story for the unit, which could provide the currency needed for a debt-for-equity swap with holders of the surplus notes.
Last year, MBIA Inc. (NYSE:MBI) settled its legal problems with Bank of America Corp (NYSE:BAC), Societe Generale SA (EPA:GLE), and Flagstar Bancorp Inc (NYSE:FBC) MBIA Inc.’s CEO said last year that there is risk remaining in their structured finance book, but they are much closer to achieving stability there.
Mark Palmer recounts that last year MBIA Inc. (NYSE:MBI) CEO Jay Brown had no reservations about having the company once again originate structured-product insurance policies. He exuded confidence by indicating that vast majority of their structured product business is performing well, excluding the CDS transactions. Moreover, their subprime RMBS business too has been performing well.
Mark Palmer believes new business stemming from the structured-product arena may become a source of value for MBI over time. Moreover, he believes the hopes of the holders of MBIA Insurance Corp’s $930 million in L+11.26% surplus notes may be linked to the company’s ability to revive its structured product underwriting efforts.