Bond insurer MBIA may be sold; meantime, it’s buying back shares and may also issue a special dividend, say analysts.
Shares of bond insurer MBIA (MBI), which saw its business plans torpedoed by a two-notch credit rating downgrade late last month, were rising Wednesday after management indicated some shareholder-friendly moves are coming, even as it had to increase accounting for Puerto Rico-related losses.
In a letter to shareholders sent late Tuesday, MBIA’s CEO Jay Brown and President & COO Bill Fallon wrote:
As we no longer have the primary objective of maintaining a specific rating on our operating company, we are unshackled from most of the limitations imposed by the rating agencies.
The stock was up 3.34% to $9.90 by 11 a.m. ET after some positive analysts comments.
MKM Partners Harry Fong suspects a special dividend may be in the offing. He wrote Wednesday:
The company is still saying that it will not seek a special dividend from its New York regulator until it sees more clarity on the Puerto Rican debt situation. However, as it no longer needs to be concerned over maintaining a double-A rating at National Public Finance, we would expect the company to repurchase shares with the excess capital that resides in the unit. Recall that under the S&P triple-A capital model, National calculates that it has about $1.7 billion of excess capital.
Fong’s view of the shares:
We believe the potential for significant return of capital from MBIA make its shares an excellent short- and long-term investment opportunity, and we reiterate our Buy recommendation with a price target of $15, based on a multiple of about 0.5x our 2018 adjusted book value estimate of about $33.70.
MBIA insures municipal bonds, including ones issued by Puerto Rico, now in a form of bankruptcy. Bond insurers have to be rated higher than municipalities for the insurance to add any value. After the downgrade by S&P Global Ratings to single-A, it said it would no longer attempt to write new business.
It laid off worksers, cut costs and announced a new $250 million share buyback program. In the letter, it pre-announced its expected losses due to Puerto Rico and raised its loan loss reserves.
Analysts Mark Palmer and Giuliano Bologna of BTIG thinks MBIA will be sold eventually. They have a Buy rating and $14 price target. They write Wednesday:
We continue to believe that with its new business prospects dashed at this point, MBI is likely to sell itself, with industry peer Assured Guaranty (AGO, Buy, $49 PT) the natural buyer. We also think both parties may look for a somewhat greater degree of clarity around the range of MBI’s losses on its insured exposures to Puerto Rico’s debt before pushing forward with negotiations.
Barron’s
By Amey Stone
July 12, 2017 11:41 a.m. ET