mbi – Page 5 – ValuePlays

Wow….so, what to think.

– Bank of America Corporation (the “Offeror”) announced today that it has commenced an offer to purchase for cash (the “Tender Offer”) any and all of the outstanding 5.70% Senior Notes due 2034 (CUSIP No. 55262CAJ9) (the “2004 MBIA Notes”) issued by MBIA Inc., a Connecticut corporation (MBIA), pursuant to a senior indenture dated as of November 24, 2004 (as supplemented, the “2004 Indenture”), between MBIA and The Bank of New York Mellon as trustee.

The purpose of the Tender Offer is to induce holders of record of 2004 MBIA Notes as of 5:00 p.m., New York City time, on November 6, 2012, and who have the right to grant or withhold consent to the 2004 Proposed Amendments (as defined below) (each an “Eligible Holder” and collectively the “Eligible Holders”) to sell their 2004 MBIA Notes to the Offeror rather than consent to certain proposed amendments to the 2004 Indenture (the “2004 Proposed Amendments”) being sought by MBIA in connection with MBIA’s consent solicitation, commenced on November 7, 2012 (the “MBIA Consent Solicitation”).

Affiliates of the Offeror are party to certain credit default swap transactions for which MBIA Insurance Corporation (a subsidiary of MBIA) has provided credit support with a notional value of $6.15 billion (against which we have established credit valuation adjustments for a significant portion). Bank of America believes that if the MBIA Consent Solicitation is successful, the risk of MBIA Insurance Corporation being placed in rehabilitation or liquidation will increase, which would jeopardize all policyholder claims, including Bank of America’s claims under these transactions.
Eligible Holders of 2004 MBIA Notes that are validly tendered and not validly withdrawn prior to 11:59 p.m., New York City time, on November 27, 2012 (the “Early Tender Date”), unless extended by the Offeror, will be eligible to receive the “Total Consideration” of $1,000 in cash per $1,000 principal amount of 2004 MBIA Notes that are accepted for payment, which includes an “Early Tender Premium” of $50 in cash per $1,000 principal amount of 2004 MBIA Notes. Eligible Holders of the 2004 MBIA Notes that are validly tendered after the Early Tender Date but prior to 11:59 p.m., New York City time, on December 11, 2012 (the “Expiration Date”), unless extended by the Offeror, will be eligible to receive only the “Tender Offer Consideration” of $950 in cash per $1,000 principal amount of 2004 MBIA Notes that are accepted for purchase.

In addition to the Total Consideration or the Tender Offer Consideration, as applicable, Eligible Holders whose 2004 MBIA Notes are accepted for purchase in the Tender Offer will also receive accrued and unpaid interest in cash from the most recent interest payment date on the 2004 MBIA Notes up to, but not including, the settlement date for the Tender Offer, which is expected to occur promptly after the Expiration Date, assuming all conditions of the Tender Offer have been either satisfied or waived. The Tender Offer is irrevocable, subject only to the satisfaction or waiver of the express conditions set forth in the Offer to Purchase. The Offeror expressly reserves the right to extend the Early Tender Date, the Withdrawal Deadline (as defined below) and/or the Expiration Date, and to amend the Tender Offer in a manner not adverse to holders of the 2004 MBIA Notes, as described more fully in the materials being sent to holders of 2004 MBIA Notes.
Eligible Holders of the 2004 MBIA Notes will be entitled to withdraw their tendered Notes prior to 11:59 p.m., New York City time, on November 27, 2012 (the “Withdrawal Deadline”), but not thereafter, unless the Withdrawal Deadline is extended by the Offeror.

The Tender Offer is subject to certain conditions including (i) there having been validly tendered pursuant to the Tender Offer, and not validly withdrawn, not less than a majority in aggregate principal amount of the 2004 MBIA Notes outstanding; (ii) MBIA shall not have obtained the requisite consent of Eligible Holders needed to validly approve the 2004 Proposed Amendments, and the 2004 Proposed Amendments shall not have become effective; and (iii) other customary conditions. By tendering 2004 MBIA Notes, an Eligible Holder will be required to represent and warrant that it is an Eligible Holder and that either it has not delivered a consent in connection with the MBIA Consent Solicitation or any consent previously delivered by it has been timely and validly revoked, and will be required to covenant that it will not deliver any consent in connection with the MBIA Consent Solicitation (or any amendment or supplement thereto) or otherwise vote in favor of the 2004 Proposed Amendments. Eligible Holders of 2004 MBIA Notes may not tender their 2004 MBIA Notes in the Tender Offer and also submit consents in the MBIA Consent Solicitation. However, Eligible Holders who have submitted consents in the MBIA Consent Solicitation and who timely and validly revoke their consents may tender their 2004 MBIA Notes in the Tender Offer.

So, what is the point? $MBI addressed this in their recent earnings call:

Since our last conference call, relatively little of significance has changed. We continue to await a decision in the Article 78 proceeding, in which Bank of America has challenged the Department of Financial Services’ approval of the creation of National Public Finance Guarantee. Since the hearing in this matter ended on June 7, I can definitively say that we’re 5 months closer to a decision, but the court has not provided guidance as to when that decision might actually come. I can also reaffirm our confidence in a positive outcome. Beyond that, there’s nothing further to report on this matter.

Similarly, our mortgage putback litigation against Bank of America and its countrywide subsidiary continues to move forward as summary judgment moment — motions were filed during the quarter. We expect that the hearing from these issues will take place in the next month and decisions to follow sometimes thereafter. We continue to be confident that we will prevail in this litigation and recent developments, including the lawsuit that the United States has brought against Bank of America, and developments in other monoline collection actions against various mortgage originators only bolster that confidence.

Unfortunately, while loss payments by MBIA Insurance Corp uninsured securitization backed by ineligible residential mortgages continue to decline, the flow of new delinquencies is not abated as quickly as we had expected. We also have taken additional loss reserves against CMBS pools where the dominant counterparty is Bank of America’s Merrill Lynch subsidiary.

Although these transactions were structured with deductibles, those deductibles are now likely to be eroded, resulting in claims being made to MBIA Insurance Corp. Depending on the timing of the deductible erosion, as well as the timing of collections on our putback claims, MBIA Insurance Corp could experience a liquidity shortfall. Ironically, Bank of America, having manufactured that shortfall by defaulting on its obligations to us, might be the company’s largest debtor and also one of its larger potential creditors.

Since the outcome of a liquidity shortfall would likely be adverse for both MBIA Insurance Corp and for Bank of America, our base case assumption continues to be that there is a negotiated global settlement between the 2 companies, but we will not accept a noneconomic settlement. So clearly, there is a risk that a settlement doesn’t take place.

With that in mind, we are taking prudent steps now that are intended to mitigate the potential adverse consequences to the stakeholders in the holding company and in National from this potential scenario by launching the consent solicitation that we announced last night. If a majority of the bondholders agree, MBIA Inc.’s debt agreements will be amended so that regulatory actions against MBIA Insurance Corp that may result from an impasse with Bank of America will not create an acceleration in the holding company’s senior debt securities. We believe the proposed amendments are positive for bondholders and have no cost to policyholders.

While there were no significant developments in our litigation in the quarter, we are clearly getting closer to resolving many of the key issues facing your company. And one thing is certain, the management team and I remain fully committee — committed to resolving them in ways that properly serve the interest of all of our stakeholders, shareholders, bondholders and policy beneficiaries.

Bank of America is not likely, based on past rulings and statements from the Judge in the case to win in court. Further, having the case docs exposed would aid others suing them for similar reason. So, they have an incentive to settle. MBIA cannot wait for a trial as they will run out of money without the $4.5B they claim they are owed. So, they will settle.

A few months back I wrote about a potential settlement. At the time I said that the eventual amount will depend on circumstances/legal decisions leading up to the 12/6 hearing date. Notice the expiration of the tender offer? 11/27. Should $BAC get enough of these notes in the offering, it looks like they will be able to block the proposed Consent Solicitation which will put even more pressure on MBIA to settle the case. Why? If the solicitation does not go through, any liquidity event at MBIA, Inc (insurance co.) would then spill over into National Insurance and the holding company (MBIA) itself as the protections they are now seeking for these notes will not exist.

This is hard core stuff by $BAC as it is not only a move to protect them in case of a liquidity event at MBIA (by not allowing MBIS Insurance to be segmented off), it is a move makes such an event far more devastating to MBIA.