MBIA Inc (MBI) ($680MM market cap) is now a shadow of its former self, prior to the 2007-2009 financial crisis, MBIA was the leading financial guarantee insurer in the U.S., where MBIA would lend out its AAA rating to borrowers for an upfront fee. This business model probably never made sense, it assumed the market was consistently mispricing default risk, the fee MBIA charged had to make it economical to transform a lower rated bond to a higher rated one.
In the early-to-mid 2000s, MBIA was leveraged over 100 times, they guaranteed the timely payment of principal and interest on bonds that were 100+x that of their equity, only a small number of defaults would blow a hole into their balance sheet. When the business was first founded, MBIA focused on municipal debt through their subsidiary National Public Finance Guarantee Corp ("National"), with the thesis being that even if some municipal bonds weren't formally backed by taxpayers, there was an implied guarantee or a government entity up the food chain that would bail out a municipal borrower. That has largely proved true (minus the recent quasi-bankruptcy in Puerto Rico), however MBIA was greedy and grew into guaranteeing securitized vehicles (via subsidiary MBIA Corp) prior to the GFC. MBIA and others (notably AIG Financial Products) got caught, finding themselves on the hook for previously AAA senior tranches of ABS CDOs and subprime-RMBS that went on to suffer material principal losses. There was no one up the chain to bail out a Cayman Islands special purpose vehicle with a P.O. box as a corporate address. A lot has happened in the 15 years since 2008, MBIA Corp stopped writing new business almost immediately, National continued to write new business on municipal issuance but stopped in 2017 after Puerto Rico went further into distress, National had significant exposure to island. The business has been in full runoff since then.
The distinction between National (municipal bonds) and MBIA Corp (asset backed securities) is important, MBIA Corp and National are legally separate entities that are non-recourse to the holding company, MBIA Inc. MBIA Corp's equity is way out of the money, completely worthless to MBIA Inc, the entity is being run for the benefit of its former policyholders. National on the other hand has positive equity value, but when consolidated with MBIA Corp on MBIA Inc's balance sheet, results in an overall negative book value. But again, these are two separate insurance companies that are non-recourse to the parent. The SEC slapped MBIA Inc's wrist for reporting an adjusted book value based on the assumption that MBIA Corp's negative book value was no longer relevant to the parent, as some compromise, MBIA Inc stopped providing the end result, but still provides the components of their adjusted book value (not sure how that's significantly different, but whatever). Here are the adjustments for Q3:
By making these adjustments, MBI's adjusted book value is roughly $28.80/share, today it trades for $12.50/share. The last two items in the adjusted book value bridge are more runoff-like concepts, these are the values that MBIA Inc would theoretically earn over time as the bonds mature in their investment portfolio and erase any mark-to-market losses (largely driven by rates last year) and then any unearned premiums assuming their expected losses assumptions are accurate.
I've kind of skipped over Puerto Rico, I've passively followed it over the years via Reorg's podcasts, it is too much to go into here, but MBIA Inc's (via National) exposure is largely remediated at this point (announcing in December that they settled with PREPA, Puerto Rico's electric utility that was destroyed in Hurricane Maria), clearing the way to sell itself. From the Q3 earnings press release:
Bill Fallon, MBIA’s Chief Executive Officer noted, “Given the substantial restructuring of our Puerto Rico credits, we have retained Barclays as an advisor and have been working with them to explore strategic alternatives, including a possible sale of the company.”
Essentially all of the bond insurance companies have stopped writing new business, the only one of any real size remaining in the market is Assured Guaranty (AGO) ($3.7B market cap). Assured has significant overlap with National that would drive realistic synergies. Street Insider reported that AGO and another company are in advanced talks with MBIA. They're the only true strategic buyer (maybe some of the insurers that bid on runoff operations might be interested too), AGO also trades cheap at roughly 0.75x GAAP book value. AGO would need to justify a purchase to their shareholders that would at least be on par with repurchasing their own stock (which they do constantly).
I bought some shares recently (I know, another speculative arb idea!).
Disclosure: I own shares of MBI
I also own this a bit. After seeing you mentioning this on one of your to-do lists in the comment section I thought there was a decent chance you'd join in the dumpster fire!ReplyDelete
Worth mentioning that insiders have been accumulating (or: gifted themselves) a ton of shares over the years while MBI has been buying back tons of shares in the open market. With the result that as of the latest proxy insiders owned 13% of shares outstanding. The CEO alone owns ~$30m worth of stock. I like those numbers - they own more than enough to have every incentive to strike a good deal, but they don't own enough to easily screw over outside holders.
I think this could be a typical case of a deal where the market doesn't like the uncertainty and complication, even though the company telegraphed pretty clearly that they want to sell and insider incentives are pretty decently aligned. Not sure where the price ends up, could be a turd, but I think odds are in our favor.
If your price target is $16 it might be worth considering looking at some of the option series.
Also, I'm wondering what will happen with MBIA corp in case of a deal. Would AGO have to buy everything? Or will it be stranded somewhere? I can see that being a headache.
Thanks for the thoughts. I sort of have sympathy for the gifting of shares here, who wants to stay at a company with no real future? There's limited individuals who have the skill set to unwind all this mess over the last decade, retention style bonuses of shares makes sense to me.Delete
I have been looking at options too, may add those.
Good questions - I do wonder why the NY regulator hasn't put this into full rehabilitation yet, taken it off of MBIA's hands. Maybe others that have followed the story or know insurance/insurance regulators more will know. But listening to their conference calls, they seem confident enough that it shouldn't be a problem. Although if AGO did buy them outright, wound throw a wrench into their financial statements, maybe that's worth another additional discount.
Thanks for the excellent writeup.ReplyDelete
Many long suffering MBI bagholders will be pretty upset over a deal at $16, especially after it traded there on deal speculation recently. By reporting adj book value at $29 they’re essentially guiding shareholders to expect a deal around $20.
I'd welcome $20, but that seems a bit too high. I will probably make the same anchoring mistake with some rumored targets that I'm bagholding too. The ask probably needs to come down a bit to get these deals done in the current market.Delete
Have you considered how fast their tangible book value per share would deteriorate if the deal doesn't materialize for another year? Would it be minimal in your opinion?ReplyDelete
Minimal yes, but you could scenario test it yourself, if you think rates or spreads are going to move significantly in one direction or another that could impact their unrealized loss/gain adjustment in the book value. But otherwise, I don't see any major issues with U.S. municipalities? Always could be something if we do get a severe recession.Delete
Also own small. Operating supplement is useful here. As of Q3, it shows $1.995b in equity at National and -$868mm at holdco for a net of $1.13bn. I'm not sure I would add back unearned premium as AGO is trading at .75x inclusive of their unearned premium number.ReplyDelete
Thanks. I feel a bit sill, missed that they published those.Delete
If they were to buy back shares or holdco bonds below par, it would probably help.ReplyDelete
Since CBIO was discussed before and I couldn't figure out a proper place to ask the question, I am posting here. Wondering of one buys CBIO shares today if they would still receive the CVR. CVR was not distributed yet even though the record date for being eligible for CVR is Jan 5th. I am assuming they will be treated as due-bills and will go to the buyer, otherwise the stock would have dropped on Jan 6th. Based on original estimates from the company, for whatever it is worth, of $2.06, after subtracting $1.43 and $0.24, the residual should be worth about $0.39. The stock in pre-market is trading at $0.28. This may be good value if (a) The company estimates are actually realized (b) the one buying the shares today actually recives the CVR. Both are risks of course.ReplyDelete
CBIO- the cvr went ex on Jan 4th. The dividend went ex today. If you buy today, you are only getting the 2.5% of newco. There are ~1.15B shares outstanding post merger.Delete
So, I am a bit confused about how that estimated $0.63 left after the $1.43 dividend breaks down. I suppose $0.63 = $0.24 + CVR + share in new co? How much is the estimated value of CVR and how much of the share in the new company?ReplyDelete
Confirmation hearing on PREPA deal is not until July. Is it clear that enough parties will agree even though MBIA has ?ReplyDelete
If I were AGO, why wouldn't I wait until PREPA deal is sealed?Delete
MBIA management has claimed they don't it necessary for it to be confirmed. We'll see, maybe it is a sticking point, but given how long this has dragged on, I'm fairly sure that MBIA management has a good sense of what needs to be done for the buyer.Delete
What's with these people, wanting to gamble with other people's money? Another disaster, ANGN wants to buy into a speculative Phase I drug company. Management should be held personally liable for such questionable behavior. ADES was another such.ReplyDelete
Thankfully I hadn't bought that one. It is odd, like no real rhyme or reason why some of these reverse mergers pop and some fall on their face. I think ADES is a slightly different example, but yeah, to your point, gambling other people's money. Investors have the choice to invest in Phase I drug companies on their own.Delete
Any opinion on CBIO at the current price?ReplyDelete
Sorry, I haven't looked at it recently (after the reverse merger announcement), sounds like others have that might chime in.Delete
On CBIO, I have no view now. Just have a piece of the newco at this point I believe.Delete
FYI, my fave ultraYOLO merger anticipation CLXT announced a deal today. Couldn't recommend in good conscience because this was a company with incipient bankruptcy, and can't recommend now because the whole indie croptech realm is until proven otherwise the land of unprofitable science experiments and broken dreams. Sold half of my position to lock in a profit and keeping the rest. May or may not be worth a look for further upside, but see above.ReplyDelete
Somebody on Twitter came up with an interesting data point, not sure if it is actionable. For years (I checked the last decade) Assured Guaranty has been incredibly consistent with earnings releases. Check for yourself: https://info.assuredguaranty.com/press-room/all-press-releases/default.aspx . The second Thursday of February they issue a press release stating when F/Y earnings will be released (quarterly earnings follow a similar pattern).ReplyDelete
This is the first February since, well, forever, where they didn't issue such a press release. Could be a coincidence, maybe the PR guy has been fired. But the timing seems a bit conspicuous given that they are the supposed buyer of MBI and that such a deal could be in the final stages.
That would be fun, let's cross our fingers, I did add to my position and added options since I published this post.Delete
MDC, Stock was slammed hard on earnings. Any change in thoughts?ReplyDelete
The stock is honestly always slammed hard on news. I’ve often thought about selling before earnings to buy back because it’s getting so predictable.Delete
There’s no substantive change as far as I can tell to the thesis.
I agree with the above, hard to see what caused the stock to tank. Still roughly the same situation, earnings call didn't reveal anything negative in my mind, sounds like the process is still ongoing. These things take more time than investors believe.Delete
How can they realize value if the sale is off?ReplyDelete
They can liquidate by putting the policies in run-off and pay out liquidation dividends. What the present value of that is or how long it takes is of course not known at this time.ReplyDelete
A bit surprised why no one wanted to buy the company though. Could be some negatives that we are missing.ReplyDelete
This is pretty disappointing, stings a bit. My best guess is its a bit of bid-ask problem here, with the stock dropping as much as it has since the beginning of the year, it was probably hard for an acquirer to pay fair value when it would be such a huge premium to the stock price. Maybe a bagholder comment, but slightly positive that they might restart the process again in Q4/Q1 2024.Delete
If they just liquidated, what would be the present value?ReplyDelete
Well the adjusted book value is $28/share, that's the future value in the finance calculator math. But that's in a full run off, most of their insured portfolio would run off in the next five years.Delete