MBIA lances structured finance from municipal business

Monoline insurer MBIA has split itself into two, creating a new business focused solely on US public finance bond insurance while siphoning off its festering structured product commitments into a separate legal entity.

Under the plan announced this morning, MBIA's public finance business will be renamed the National Public Finance Guarantee Corporation (NPFGC), in a move the guarantor claims will "facilitate both transparency and future capital-raising efforts". The restructuring has been approved by the state insurance departments of both New York and Illinois (the new company is built on an MBIA subsidiary in Illinois, and will move to New York State, where MBIA is based).

As part of the restructuring, all of MBIA's US public finance business, including its obligations to $184 billion of US municipal bonds wrapped by the Financial Guaranty Insurance Company (FGIC), which MBIA agreed to reinsure in August 2008, will be placed in a wholly separate company from the structured finance business responsible for the guarantor's ratings downgrade in early 2008.

All told, the public finance portfolio that will be transferred into the NPFGC had a total net par outstanding of approximately $537 billion as of September 30, 2008. The company also confirmed that NPFGC will not use credit derivatives to guarantee new insurance transactions.

The company's remaining book of structured finance and international business, as well as the guaranteed investment contracts and medium-term notes, will be retained under the trading name MBIA Corp.

The firm plans to resume business in the international public finance and global structured finance markets when its ratings and market conditions permit, it said in a statement, adding that it believes the structured business "remains adequately capitalised with claims-paying resources and liquidity that will permit these entities to continue to meet all of their expected obligations as and when they become due".

"Today's announcement is the first major step toward transforming our business for the future. As new insured municipal bonds are issued, I expect the public finance markets will begin to thaw, freeing up much needed capital for future projects," said Jay Brown, MBIA's chief executive. "Ultimately we intend to be back in the structured finance and international markets, but we will maintain strong operational and legal separation between those businesses and the US public finance business."

The idea of severing the ailing structured finance arms of monolines from healthier public finance portfolios was first suggested by US regulators in February 2008 as the declining credit quality of structured credit products wrapped by the financial guarantors led to ratings downgrades of MBIA, FGIC, Ambac and other monolines.

The fallout was felt heavily by municipalities that relied on bond insurers for credit enhancement. Downgrades led to an exodus of institutional investors from floating-rate financing such as variable-rate demand notes and to the ultimate collapse of the auction-rate securities market, costing public authorities across the US heavily in restructuring, termination and penalty fees.

See also: Ambac, MBIA finally succumb to S&P downgrade, Moody's to follow suit
MBIA losses climb to $2.4 billion
FGIC could be first to split
US regulators reveal plan to split monolines