Thursday, December 20, 2007

MBIA Bond Risk Soars on $8.1 Billion CDO Disclosure

(Bloomberg) -- MBIA Inc. tumbled the most since 1987, and the risk of default soared after the world's biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages.

Credit-default swaps tied to Armonk, New York-based MBIA's bonds climbed 115 basis points to 595 basis points, the widest on record, according to CMA Datavision in London. MBIA shares plunged $4.73, or 18 percent, to $22.29 as of 9:38 a.m. in New York Stock Exchange composite trading.

MBIA posted a document on its Web site late yesterday showing it insured the so-called CDOs-squared, a potentially riskier form of security than what the company typically guarantees. Rising defaults on subprime mortgages packaged into securities have led to bond downgrades and threatened MBIA's AAA guaranty rating.

``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''

The disclosure followed Standard & Poor's decision yesterday to lower its outlook to negative for the AAA ratings of the bond insurance units of MBIA and Ambac Financial Group Inc.

Credit-default swaps tied to MBIA's AAA rated bond insurer, MBIA Insurance Corp. climbed the most in at least a year. The five-year contracts, used to speculate on the company's ability to repay its debt or hedge against the risk it doesn't, rose 55 basis points to 295 basis points, CMA prices show.

Contracts tied to Ambac rose 30 basis points to 595 basis points, according to CMA. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

Changes Perceptions

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Zerbe said the CDO disclosure explains why S&P and Moody's Investors Service turned more negative on MBIA in recent weeks. Last month, Moody's had said that MBIA was ``unlikely'' to fall below its target capital level for an AAA bond insurer despite widespread downgrades of securities backed by subprime mortgages. Ambac had been flagged as ``moderately'' likely to need more capital.

``This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac,'' Zerbe wrote.

Subprime mortgages are made to borrowers with poor or limited credit histories or high debt burdens.

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