On Monday we asked, how junky is MBIA?
From Standard & Poor’s this morning, perhaps a little irony-tinted light is shed on how the bond insurer has managed to find someone to swallow its unpalatable $1bn bond issue.
(A bond issue which, by the way, is way down the capital structure and depends on the state insurance department’s whim for the payment of its coupon or the return its principal)
MBIA may have sold the dodgy $1bn bond issue to a specially created CDO.
Bloomberg reported -via the wires- on Tuesday:
Jan. 15 (Bloomberg) — HSBC Holdings Plc, Europe’s biggest bank by market value, set up a collateralized debt obligation to repackage so-called surplus notes sold by insurance companies to bolster capital, according to Standard & Poor’s.
HSBC’s CDO will be denominated in pounds and sold through a company called Starts (Ireland) Plc, according to an S&P report. Surplus notes are bonds issued by insurance companies that U.S. regulators consider equity.
MBIA Inc., the largest bond insurer, last week sold $1 billion of the securities to stave off a downgrade of its insurance unit. The Armonk, New York-based company paid a yield of 14 percent on the notes that are the last to be paid before equity investors in the event of bankruptcy.
Notice also that bond insurers are referred to in the plural, so could the Starts CDO be looking to buy-up rickety, emergency debt issues from other monolines?
How on earth does this fly? Bloomberg again:
The securities will carry the top investment-grade credit ratings, S&P said. HSBC will enter into an agreement with bond investors to protect them against currency swings, the surplus notes defaulting or declining in value.
In other words, it could be that HSBC are insuring (using swaps) this CDO’s monoline-bond-backed notes, and by doing that, propping up the monoline.
In a way, it’s clever because from HSBC’s point of view, they’ve saved the bond insurer, without actually paying for it (not yet, anyway).
And by doing so, HSBC has also decreased the likelihood of the swaps being triggered anyway. If the monolines hit trouble again in the future, HSBC could happily allow them to sell more subordinated debt to the CDO. In doing so, those CDS swaps need never be triggered.
For investors in the CDO, they’ll get high-returns (the MBIA bond was sold at 14 per cent) and downside protection from HSBC. Win win!
…or possibly, if this fills you with unease and suspicion, not.
