MBIA Inc., the bond insurer fighting with Bank of America Corp. over soured mortgage securities, said there is “substantial doubt” about the ability of the unit that backed those claims to continue as a going concern.
“The company has concluded that there is a significant risk” of its MBIA Insurance Corp. subsidiary “being placed into a rehabilitation or liquidation proceeding” by New York state’s financial regulator, the insurer said Wednesday in a statement distributed by Business Wire. “Therefore, substantial doubt exists about MBIA Corp.’s ability to continue as a going concern.”
MBIA and Bank of America have been negotiating the settlement of lawsuits over mortgage securities that soured during the U.S. housing crisis five years ago. The MBIA unit guaranteed contracts protecting BofA and its subsidiaries from losses on commercial-mortgage debt. At the same time, MBIA is seeking to force the bank to buy back faulty loans that were included in residential-mortgage securities that MBIA insured.
While MBIA said it expects the unit will have adequate cash to cover claims, that forecast hinges on a “comprehensive settlement” with the bank, it said in the statement Wednesday.
Kevin Brown, a spokesman for Armonk, New York-based MBIA, declined to comment.
The cost of credit-default swaps protecting investors against a default by the MBIA Insurance unit rose 2.5 percentage points to 42.9 percent upfront as of 4:17 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That means it would cost $4.29 million initially and $500,000 annually to protect $10 million of obligations.
Swaps tied to the parent company increased 1.3 percentage points to 16.5 percent upfront, the data show. MBIA split its municipal-bond insurance business into a new unit in 2009.
In a move to prevent the parent company from being dragged into bankruptcy by the insurance unit, MBIA last year asked bondholders to alter the terms of its bonds. After Bank of America bid to buy some of the debt to block the amendment, the insurer purchased about 52 percent of the securities in order to ensure it had sufficient support.
“What MBIA did was orphan the MBIA Insurance unit with the consent solicitation, so the concern had been previously that if MBIA Insurance ran out of liquidity and it was seized by its regulator, that rehabilitation would trigger a cross default,” Mark Palmer, an equity analyst for BTIG LLC, a trading firm in New York, said in a telephone interview.
Bank of America sued the debt insurer in December, saying it interfered with the tender offer for the securities involved in the consent solicitation.
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