March 4, 2008 / 6:02 PM / 12 years ago

INTERVIEW-Whitman Says MBIA Worth at Least $35 a Share

NEW YORK (Reuters) - MBIA Inc (MBI.N) is worth more than twice its current share price and its stock could rebound by year-end if the bond insurer’s credit rating gets a stable outlook, famed distressed investor Marty Whitman said.

MBIA is poised for a dramatic turnaround after an 80 percent plunge in its stock price over the past 12 months because the company has or will have the cash on hand to meet all claims, Whitman told Reuters in an interview on Monday.

And even if the company loses its top credit ratings and cannot win any new business, it is still worth $35 to $45 a share, he added. MBIA shares closed at $12.62 on Monday.

Short-sellers, who profit if a company’s stock drops, argue that MBIA will likely be overwhelmed by insurance losses and other calls on its ability to pay after the company guaranteed repackaged subprime mortgage bonds and other risky assets.

But Whitman, founder and co-chief investment officer of Third Avenue Funds — the largest MBIA shareholder, according to the most recent regulatory filings — said anyone making that argument does not understand MBIA’s risk. The company has made some mistakes, Whitman said, but on the whole he has the utmost confidence in MBIA’s underwriting decisions.

“We have interviewed the MBIA people up the kazoo and I am convinced they are utterly responsible, diligent underwriters, and the probabilities are they’ve done a terrific job,” Whitman said.

For its structured securities, including the repackaged subprime mortgage bonds whose creditworthiness investors have questioned for months, MBIA has made sure it is last in line to sustain losses if other investors in the pool of assets suffer.

And MBIA has about $17 billion of claims-paying ability, including recently raised capital, future premiums and other items. Subprime mortgages are not doing well, but that doesn’t mean they will likely perform badly enough to exceed MBIA’s ability to pay claims, Whitman said.

In a letter to shareholders on Monday, MBIA Chief Executive Jay Brown again sought to assuage concerns about the company:

“The fact is, the losses from the U.S. mortgage market would have to be many times higher than any credible projections before MBIA’s ability to satisfy its obligations to policyholders would be compromised.”

At issue is how much the credit crisis can worsen and whether market prices for structured finance securities such as collateralized debt obligations are irrationally low.

Prominent short-sellers like Bill Ackman, founder of Pershing Square Capital Management, say the most toxic asset-backed securities will likely perform as badly as the market seems to suggest.

The insurers will have to make high payouts in the future that will threaten their ratings, hurt their ability to win new business and ultimately force the insurers’ holding companies to file for bankruptcy.

Ackman, whose criticism of MBIA has been widely followed by the media and investors, has been betting the company’s shares would tumble since 2002.

Whitman believes credit markets are unduly pessimistic about eventual losses in many structured finance securities.

“The analysts — Ackman and all the others — have no background in distressed securities,” Whitman said.

Ackman was on vacation and could not be reached for comment, a receptionist at Pershing Square said.


MBIA is in a better spot than some of its rivals, most notably Ambac Financial Group Inc ABK.N. Moody’s Investors Service and Standard & Poor’s affirmed the top credit ratings at MBIA’s main insurance unit last week, and the company just raised $2.6 billion of debt and equity.

Ambac, on the other hand, is working to raise additional capital, and negotiations are going slowly, according to people involved. S&P and Moody’s may cut the insurer’s ratings.

Even for MBIA, there may still be difficulty ahead with the rating agencies — both S&P and Moody’s say the outlook for MBIA’s ratings is negative, signaling downgrades are possible over the medium term.

MBIA said on Monday that the agencies will observe the company over the next 12 to 18 months to see if actions to change its business model and new capital additions will help its ratings outlook return to stable.

Brown said discussions with the agencies continue. “It is my view that we are now heading toward a stable situation, barring any major changes in their views of the world.”

Whitman said, “Every type of investment has got something wrong, and I think a big thing wrong with the bond insurers is, you’re at the whim of the rating agencies.”

Third Avenue owns about 23 million MBIA shares and 3 million Ambac shares.

Editing by John Wallace

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