January 15, 2013 / 5:50 PM / 5 years ago

UPDATE 2-NY regulators block MBIA interest payment on notes

* Payment had been scheduled for Tuesday

* Regulator denies permission outright

* S&P downgrades notes

Jan 15 (Reuters) - New York state regulators on Tuesday blocked bond insurer MBIA Inc from making an interest payment on a series of surplus notes but neither the company nor the regulator would say why.

The request came from MBIA Insurance Corp, the company’s structured finance subsidiary. The interest payment on the 14 percent fixed-to-floating-rate surplus notes due 2033 was scheduled for Tuesday.

Standard & Poor’s downgraded the notes to a “C” rating from “CCC” because of the nonpayment of interest. IFR reported that the cost of protecting MBIA Insurance debt against default also surged on the news.

MBIA shares sank last July when the company said it had not yet received approval from the New York State Department of Financial Services to make a scheduled interest payment on the notes. A few days later it received that approval, and the stock rebounded slightly.

But this time the department denied permission outright. An MBIA spokesman declined to comment on the reason. A spokesman for the department was not immediately available to comment.

Under the terms of the notes, MBIA said, it does not have to make an interest payment if the regulator does not approve it, and the fact that it will not make the payment does not constitute a default under any of its other notes.

MBIA Inc, battered by losses on insured mortgage-backed securities, previously split its business into two: a municipal guarantee business and the structured finance unit.

Banks later sued the company, contending that the split was intended to defraud policy holders by leaving the MBIA Insurance unit under capitalized and siphoning $5 billion from that unit at their expense. MBIA has denied those charges.

MBIA shares rose 2.3 percent to $8.30.

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