(BUSINESS WIRE)–MBIA Inc. (NYSE: MBI – News) today announced that its insurance subsidiary, MBIA Insurance Corporation (MBIA), has agreed to reinsure a portfolio of U.S. public finance bonds (the “public finance portfolio”) insured by Financial Guaranty Insurance Company (FGIC) with total net par outstanding estimated to be approximately $184 billion as of September 30, 2008. MBIA will receive unearned upfront premiums, net of a ceding commission paid to FGIC, of approximately $741 million in connection with the reinsurance.
The deal has been brokered by NY State Insurance Super Eric Dinallo. For Bloomberg at least, it’s a sign that MBIA is on the rebound.
The deal is pretty good for MBIA. These are muni bonds – paper which is unlikely to default. And the large $741m windfall – premiums paid up front – might even lead to a credit rating upgrade.
FGIC benefits from de-risking slightly, but it’s really the incidental party here. It might not be on the very brink of insolvency anymore, but it’s not exactly been left ship-shape. Effectively, FGIC has outsourced its one credible business operation to MBIA. So It’s monoline market consolidation by any other name. Bad luck Blackstone.
For Dinallo himself, the deal is a killing-two-birds-with-one-stone kindof affair. On the one hand, it supposes to help out the owners (and issuers) of muni bonds wrapped by FGIC by bolstering those bonds’ ratings, and on the other hand, it shores up MBIA’s business itself, in turn helping its muni clients.
But did no-one tell Dinallo? Muni bond markets don’t really care about monoline insurance anymore. Indeed, in some cases, unwrapped muni bonds have been placed at lower spreads than wrapped ones… monoline insurance, let alone reinsurance, is seen as something of an opaque hindrance – unwanted for those who’d rather just adjudge the underlying credit risk of the muni bonds themselves.
Here’s what fixed income manager Kenneth Naehu tells Bloomberg:
MBIA, Ambac and FGIC, all three are being thrown in the same bucket… The bonds are trading as if they don’t exist, as if there is no insurance.