Friday, July 13, 2012

MBIA (MBI) - Vol Rises into the Day of Reckoning; Here's the Story

MBI is trading $10.53, up small with IV30™ up 0.7%. The LIVEVOL® Pro Summary is below.


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MBIA Inc. (MBIA) together with its consolidated subsidiaries, operates the financial guarantee insurance businesses in the industry and is a provider of asset management advisory services. These activities are managed through three business segments: United States public finance insurance, structured finance and international insurance, and advisory services.

This is a vol note, specifically an elevated vol note along with a calendar diff in what has now become an "event" stock surrounding a potential settlement.  The story is involved and a day of reckoning may be upon us.

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). Then we'll move to the news (the "event.").

On the stock side, we can see a bumpy ride -- the stock was trading over $13 six months ago and is now in the mid $10 range. I've highlighted the recent move, which saw an abrupt gap down and a recovery all in three days. Here's a quick summary via some news snippets:

7-10-12: Stock dropped from $10.61 to $9.66 (9%)

MBIA Inc.'s shares fell more than 7 percent Tuesday after the bond insurer disclosed that regulators have not determined whether it would be allowed to make a scheduled interest payment on the notes of one of its subsidiaries.

The company said Tuesday in a filing with the Securities and Exchange Commission that the New York State Department of Financial Services has not yet determined whether to approve its request to make the scheduled interest payments on surplus notes for MBIA Insurance Corp. The payment is due July 16 on the surplus notes, which are regulated by the state agency. MBIA cannot make a payment without the agency's approval per state law.

MBIA split its municipal bond insurance arm from its finance insurance arm, MBIA Insurance Corp., in 2009. It was trying to improve its business by breaking off units that provide guarantees on riskier products after getting burned by losses on its coverage of risky financial instruments such as mortgage-backed securities

Source: MBIA shares fall on regulator indecision

That's a nice write up from AP. There is a bit more behind the story. Ultimately MBI does have the liquidity to make the payments, it's literally a matter of an approval from NYSDF. But the larger issue is whether or not the company should have been allowed to restructure (spin-off) its riskier insurance arms -- arms that may owe big boys like BofA a lot of money. BofA and Societe Generale are the only two remaining litigants (is that a word?) that have not settled yet.

Alison Frankel of Thomson Reuters has been following this case for a while and posted a great article summarizing the gamesmanship on 7-10-2012. I've included a chunk of her article, but it's worth reading the entire thing if this kinda stuff interest you.

(Reuters) - Throughout the four-week trial this spring over whether New York state insurance regulators properly approved MBIA Inc's 2009 spin-off of its troubled structured finance business, one constant was the unshakeable alliance between MBIA and its co-defendant, the New York Department of Financial Services.


It's no secret that the current head of DFS, Benjamin Lawsky, wanted to resolve challenges to MBIA's restructuring before the case got to trial;
But once the trial began, the state and MBIA were tied tightly together in opposition to the banks and their lawyers at Sullivan & Cromwell.

It's no longer clear that this is true. On Tuesday, MBIA filed an 8-K with the Securities and Exchange Commission disclosing that DFS "has not yet determined whether to approve" MBIA's request to make a scheduled interest payment on an issue of surplus notes.

The DFS's foot-dragging should not be construed as a declaration that insurance regulators have now determined that MBIA's structured finance arm, MBIA Insurance, is insolvent. It's possible (though not probable) that regulators, who have until Friday to approve the interest payment, are just taking an unusually long time to approve MBIA's request. And even if DFS refuses to authorize the payment, that's not considered an event of default on the notes. Under the terms of the $1 billion private placement, if insurance regulators do not approve a payment of interest or principal, the payment is simply extended until MBIA obtains approval. (Or, as MBIA phrased the situation in the 8-K: "No payment becomes due absent the NYSDFS approval.")

But it's a stretch to regard this regulatory delay as a mere coincidence. DFS has never before forced MBIA so close to the brink that the insurer has had to file an 8-K informing investors that it might not be permitted to make a scheduled interest payment. A DFS spokesman told me the department has no comment on the matter of MBIA's scheduled payment, but Lawsky well knows that Kapnick is deep into deliberation on the banks' regulatory challenge. He also knows that the banks have made an issue of MBIA's solvency, even though it's technically not relevant to the judge's consideration of whether Lawsky predecessor Eric Dinallo rushed improvidently into approving MBIA's restructuring.


Again, we shouldn't construe the DFS delay in approving the interest payment as a signal that Lawsky now believes MBIA is insolvent -- but we should regard it as a warning to the insurer and, perhaps, a nudge toward settling with BofA and SocGen before Kapnick rules.

Only a settlement, after all, will assure the state's foremost objective, which has always been to protect MBIA's muni bond policyholders. The state's secondary goal is to get MBIA back into the business of writing muni policies, which is why Lawsky has cut the insurer considerable slack to remove the overhang of structured finance liability, twice allowing MBIA Insurance to borrow huge sums from the muni bond business, MBIA National, to fund commutation deals with banks.


MBIA's entanglement with BofA is complicated, of course, by the insurer's billions of dollars of claims against Countrywide for allegedly deficient mortgages underlying securities MBIA insured.

Source: Reuters via Yahoo! Finance; What message is regulator sending MBIA? Frankel,written by Alison Frankel.

This has turned into quite the showdown. After that stock drop though, MBi shares rebounded yesterday (7-12-2012) on this news:

Bond insurer MBIA (MBI) is advancing after research firm MKM Partners said that New York State may be pushing the company to settle its litigation with two banks. Specifically, New York's Department of Financial Services, or NYSDFS, may be delaying giving permission to MBIA to make a scheduled payment to some of its bondholders as a means of pressuring the company to settle its litigation with the banks, Bank of America (BAC) and Societe Generale (SCGLY), MKM Partners asserted. As a result, MKM thinks the conclusion of the litigation may be drawing closer.
The research firm believes that MBIA and the banks will have an easier time reaching a settlement following prodding by the NYSDFS. MKM maintains a Buy rating on shares of MBIA. In late morning trading, MBIA rose 19c, or 1.93%, to $10.03.

Source: theflyonthewall via Yahoo! Finance; MBIA climbs after firm says BofA settlement moving closer

Needless to say, the risk is heightened right now for MBI. Looking back to the Charts Tab (above), we can see how the vol has spiked since the beginning of July. IV30™ has gone from 48.12% on 7-2-2012, to now 92.26%, or a 91.7% rise in less than two weeks.

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols.

Two things caught my attention here. First, we can see how the front is elevated to the back -- the risk of the "event" is reflected in the near-term (like before Jul expiry). I also note the two-sided skew in Jul -- the option market reflects even upside and downside risk, which is not the "normal" shape of skew. From what I've read, it does seem like today or Monday is the day of reckoning, so to speak.

To learn about option skew, you can go to his post:
Understanding Option Skew -- What it is and Why it Exists .

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the monthly vols -- Jul is priced over 100%. I do note that August has an earnings release, yet its Jul that's elevated to Aug. That's not trivial and speaks to the risk inherent in this decision / settlement / payment delay. It feels like something is coming soon...

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