NEW YORK, Nov 30 (IFR) - Bank of America lost leverage in settlement talks with bond insurer MBIA ahead of opening arguments in a trial that would hold the bank liable for the past deeds of its Countrywide Financial mortgage unit.
On Monday, MBIA announced that it had successfully closed a consent solicitation across seven series of notes that will allow it to amend critical language in its debt covenants.
MBIA began a consent solicitation on November 7, offering US$10 per US$1,000 in consenting bonds. The solicitation expired on November 21. BofA later stepped in and offered to buy the 5.7% 2034 notes - which had traded below 65 - at par, including a premium, hoping to build a blocking position.
MBIA deftly out-maneuvered the bank and negotiated to buy roughly US$170m of the 2034 notes in private transactions directly from holders.
Bondholders apparently snubbed BofA's attempt to thwart the consent solicitation, giving MBIA majorities across all seven series of the notes, including the 2034 notes.
MBIA said it had completed its consent solicitation, which would allow it to amend indentures on its 6.4% 2022 notes, 7% 2025 debs, 7.15% 2027 debs, 6.625% 2028 debs and its 5.7% 2034 senior notes.
MBIA's maneuver prompted BofA to accuse the insurer of "using its resources to buy back its own bonds to gain 'consent' instead of honoring its obligations to its policyholders".
The cash MBIA used to short-circuit BofA's tender came from its holding company, where, according to research analyst MKM Partners, there was US$335m in liquid assets at the end of the third quarter. MBIA said the use of cash at that level had no impact on policyholders.
Five-year CDS on MBIA tightened by more that 205 basis points (bp) to 950 following the successful solicitation.
Spreads on MBIA Insurance which blew out by nearly 2,500bp after BofA attempted to block the deal tightened by 1,860bp to 2700.
The successful solicitation allowed MBIA to amend its debt indentures to prevent cross defaults. Now, if the MBIA Insurance subsidiary were put into rehabilitation or liquidation, it would not have any impact on the MBIA holding company or its municipal bond insurance subsidiary National Public Finance Guarantee.
BofA said it would continue to pursue options to protect its interests as a policyholder and would attempt to ensure that MBIA fulfilled its financial obligations to all policyholders, "including making good on the billions of dollars we believe MBIA will owe us under insurance policies they provided to us".
MBIA responded by saying that BofA had no current claims under the MBIA policies it held. MBIA's estimated economic damages from the bank's refusal to honor its contractual obligations related to ineligible mortgages, however, total nearly US$5bn, the insurer said in a statement.
"The payment of these damages by would substantially reduce any uncertainty regarding MBIA Corp.'s ability to pay all of its expected claims, including any potential claims that might arise under policies held by itself," the insurer said.
If BofA had been successful with its offer, it would have gained leverage in its negotiations to settle claims MBIA is pressing related to failing mortgages that it and its Countrywide Financial unit insured.
MBIA is set to make oral arguments in court on December 5 that BofA has primary and successor liability for the actions of Countrywide.
As the two negotiate ahead of this trial, MKM analyst Harry Fong argued that BofA wanted to keep the possibility of a holding company bankruptcy event on the table.
"MBIA's successful indenture switch places the company in a much stronger position as it attempts to negotiate a global settlement with," Fong said.
For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......