MBIA's $1 Bln Debt Sale Stalls as Investors Balk

By Walden Siew

NEW YORK (Reuters) - A planned $1 billion debt sale by MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) may be delayed until next week, investors familiar with the offering said on Thursday, as the market demands higher concessions to help the world's largest bond insurer shore up its capital and defend its rating.

The news came a day after MBIA slashed its dividend and said it would sell $1 billion of so-called surplus notes and buy reinsurance. The moves are part of an effort to preserve capital and the "triple-A" ratings the bond insurer needs to operate normally.

The surplus note sale, which had been expected to price on Thursday, has a fixed coupon of between 9 percent and 12 percent, nearly double what similarly rated bonds offer, according to investors briefed by dealers on the transaction.

Surplus notes are bonds specific to the insurance industry, but they can be classified as equity by some state insurance regulators. That allows ratings companies to count some of the securities as equity, bolstering the insurers' balance sheets.

Pricing is not likely until next week, with investors haggling over increased protections, a source familiar with the deal said. The MBIA bond could carry a fixed coupon as high as 11 percent for five years, according to a second investor.

An MBIA spokeswoman declined to comment.

How the debt sale is received may be a test case for other bond insurers as they seek to shore up their capital base.

Surplus notes are "not something you see that often, so some investors are wondering what they are again, and how does it work," said Cynthia Cole, a portfolio manager at Allegiant Asset Management in Cleveland, Ohio.