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
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
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
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
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.
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