MBIA Splits Structured Finance/Mortgage Exposures from Munis

Bond insurer MBIA has split its non-municipal exposures - including its problematic mortgage-related exposures in the structured finance sector - into a separately capitalized company. "This is not a 'good bank/bad bank' split, although that is how I expect many observers will report on the change," said MBIA chairman and CEO Jay Brown in a letter to investors. He said that structured finance policyholders should "feel very comfortable that their policies remain in an entity with ample claims-paying resources to meet any expected claims, even under our stress loss scenarios." He added that the company would "no longer use credit derivatives to guarantee new insurance transactions" of any type because "exposure to this market injected too much volatility into our financial statements." In response to the restructuring, Moody's Investors Service has downgraded the insurance financial strength ratings of MBIA Insurance Corp. and its supporting subsidiaries while placing the rating for the municipal subsidiary on review for possible upgrade. The downgraded ratings have a "developing" outlook, the rating agency said. Moody's cited among reasons for its ratings moves "the deteriorating credit profile of alt-A mortgage-backed securities, corporate CDOs and CMBS - all of which are negatively affecting MBIA Corp.'s risk-adjusted capital adequacy." The rating agency added, "The claims-paying resources of MBIA Corp. post-restructuring are roughly equivalent to Moody's expected loss estimates for the entity." It also noted that MBIA Corp.'s developing outlook "reflects the potential for further deterioration in the insured portfolio. It also incorporates positive developments that could occur over the near to medium term, including greater visibility about mortgage performance, the possibility of commutations or terminations of certain ABS CDO exposures, and/or successful remediation efforts on poorly performing RMBS transactions." In addition, Moody's said the developing outlook "is also based on the potential for various initiatives being pursued at the U.S. federal level to mitigate the rising trend of mortgage loan defaults."