MBIA's Surplus Notes Plunge on Investor Worries

NEW YORK (Reuters) - Mounting concerns that MBIA Insurance Corp lacks enough capital to cover subprime bonds it insures have pushed $1 billion of surplus notes recently issued by the company down about 10 cents on the dollar in the last two days, portfolio managers said on Wednesday.

The notes, issued by the embattled bond insurer to shore up capital and preserve its crucial triple-A credit rating, fell 5 cents on the dollar to about 89.5 cents on Wednesday and are now yielding 17 percent, said Wayne Schmidt, senior portfolio manager at AXA Investment Management.

MBIA's notes yielded 14 percent when they were first sold on Jan. 11. A higher yield suggests that sellers of MBIA's notes in the secondary market are having to sweeten the deal to entice potential buyers.

Robert Bishop, portfolio manager at SCM Advisors, said investors are worried that MBIA may have to raise more capital if rating company Standard & Poor's slashes ratings on more subprime bonds.

Standard & Poor's on Tuesday raised its expectations of losses on subprime loans originated in 2006 by more than a third. The revisions may adversely affect ratings on outstanding mortgage-backed securities. For details, see [nN15546665].

"The concern is that (S&P's) change in some of the assumptions will impact the amount of capital that these guys are going to have to put up," Bishop said.

Surplus notes, unique to insurers, can bolster MBIA's balance sheet since they can be classified as equity.

MBIA Insurance is a unit of MBIA Inc (MBI.N), whose shares have plunged in the past year on speculation the company lacks sufficient capital to cover losses on bonds it insures. For details, see [nN11285877].

On Wednesday, MBIA Inc's shares were down more than 13 percent at $13.83.

The cost to protect MBIA Insurance's bonds from default rose almost 75 basis points to 450 basis points, according to Markit Intraday, meaning it costs $450,000 per year for every $10 million insured.

"The investor community has some serious concerns about MBIA," AXA's Wayne Schmidt said. "There's got to be some concerns of either default or somebody calling something in that would cause that kind of decline," he said, referring to the surplus notes.

(Reporting by Neil Shah; Editing by Frank McGurty)