Thursday, January 17, 2008

Do Rating Agencies Do Anything?

"MBIA, whose triple-A rating is under threat of downgrade by rating agencies, could squeak by with a clean bill of health after privately placing $1 billion of bonds in a debt issue last week that MBIA says was oversubscribed--perhaps because of the 14% yield MBIA agreed to pay. A lack of investor confidence is evident in the 14% yield MBIA agreed to pay on its $1 billion double-A-rated bond issue last week, more than double the average of similarly rated U.S. corporate bonds", Karen Richardson at the WSJ, 15 January 2008.

"There may be another wave of credit-rating downgrades of subprime-mortgage securities. [S&P] yesterday sharply raised its projected losses for subprime mortgages made in 2006 to 19% from 14%, as loan deliquencies are rising", WSJ, 16 January 2008.

What do the rating agencies do? MBIA sells 14% debt rated AA, while MBIA's stock is rated AAA. What madness. AA corporate debt yields less than half of 14%.


Tom Stone said...

And that debt is selling for 80% of face value.An insufficient discount IMO.

Independent Accountant said...

We'll see if the monolines survive.

Anonymous said...

From the MBIA press release of Jan 16th "The offering consists of $1 billion principal amount of Surplus Notes due in 2033 at an initial interest rate of 14 percent until January 15, 2013 and thereafter at an interest rate of three-month LIBOR plus 11.26 percent. The Notes are callable at par at the Company’s option on the fifth anniversary of the date of issuance and every fifth anniversary thereafter."
1) who put up the money and why?
2) the annual carrying cost, plus their declining Qtrly Revenue Growth (yoy):
can only lead to self-destruction unless one believes in tooth-fairies
3) BofA put billions on better terms into Countrywide last summer for a reason, which is now evident
4) where did the MBIA billion come from, what is the reason, where is the longterm investment opportunity (we know it is not in the notes nor in MBIA, but it may be in a long or short position in a 3rd party)
5) From the press release:
“We are very pleased with the completion of our Surplus Notes offering,” said Gary C. Dunton, MBIA Chairman and Chief Executive Officer. “The sale of the Surplus Notes is a key element of our capital plan as is the previously disclosed $500 million equity commitment from Warburg Pincus, which we currently expect to close by the end of January, and their commitment to backstop a $500 million rights offering."
5) what is Warburg Pincus up to? Who are they acting for?
6) Is Buffet's new company going to end up with the portfolio?

Too many questions, not enough answers. No transparency on insuring public debt instruments. Nuts!

Independent Accountant said...

I have wondered about some of these things too. There was a recent article in Forbes about the split in opinion on the monolines between Ackman of Pershing and Warburg. Believing Warburg has some smart guys working for it, I have speculated that it is really fronting for someone else. To think that Warburg would put $1 billion of its' own money into MBIA taxes belief.