MBIA and subsidiary’s surplus noteholders agree to provide financing

By Caroline Salls

Pittsburgh, Nov. 28 – MBIA Inc. wholly owned subsidiary MBIA Insurance Corp. accepted a binding commitment from holders of its 14% fixed-to-floating-rate surplus notes and from MBIA Inc. under which the surplus noteholders or their affiliates agreed to provide senior financing of up to $325 million and the company agreed to provide subordinated financing of $38 million, according to a news release.

MBIA Insurance will use the proceeds of the facility, together with about $60 million from its own resources, to pay an anticipated claim on its insurance policy insuring notes issued by Zohar II 2005-1, Ltd. and Zohar II 2005-1 Corp., which mature on Jan. 20.

In addition to the $38 million of subordinated financing to be provided by MBIA, the company agreed to provide up to an additional $50 million of subordinated financing to MBIA Insurance under the facility, if needed, to provide additional liquidity.

“This financing, together with MBIA Corp.’s acquisition of the Zohar II notes from Assured and the use of its own resources, will enable MBIA Corp. to satisfy its obligations on the Zohar II notes on Jan. 20, 2017,” MBIA Insurance president and chief financial officer Anthony McKiernan said in the release.

“The Zohar I notes defaulted in November 2015, and the Zohar II notes are expected to default in January, which represents approximately $1.3 billion in defaulted Zohar notes.

“We remain prepared to work with Patriarch Partners and the collateral manager of the Zohar entities to institute a transparent and comprehensive plan to sell or refinance the assets owned by the Zohar entities in an orderly manner to ensure that their obligations are fully satisfied.

“While we believe that a consensual approach is preferable and in the interest of all parties, in the absence of the implementation of a good faith plan, we will continue to aggressively seek to enforce our rights to the full reimbursement of the insurance claims we paid.”

MBIA currently owns Zohar II notes with an outstanding principal amount of $38 million and expects those notes to be paid in full on the maturity date, subject to closing of the facility.

The closing of the facility and of the sale of MBIA UK Insurance Ltd. are expected to enable MBIA Insurance Corp. to successfully address its insurance obligations related to its insurance policy insuring the Zohar II notes.

The closing of the facility is subject to MBIA Insurance Corp. acquiring the Zohar II notes with an outstanding principal amount of $347 million from Assured Guaranty Corp. in connection with the sale of MBIA UK, receipt of any required regulatory approvals from the New York State Department of Financial Services and the execution of final documentation.

The facility is expected to close by Jan. 20.

Special purpose entity

According to an 8-K filed with the Securities and Exchange Commission, in connection with the financing, a bankruptcy remote special purpose entity will be organized to act as the direct borrower from the senior lenders and from MBIA.

The senior lenders will purchase senior notes issued by or make senior loans to the new company with a total principal amount of up to $325 million, and MBIA will purchase subordinated notes issued by or make subordinated loans to the new company with a total principal amount of $38 million.

The new company notes and the MBIA loans will mature on Jan. 20, 2020 and will bear interest at 14%. Interest on the new company notes will be payable in cash, but may be payable in kind at the option of MBIA Insurance Corp. to the extent that recoveries on a collateral and cash sweep is less than the unpaid interest.

MBIA Insurance Corp. has agreed to pay a commitment fee to the senior lenders, a portion of which may be financed by the issuance of additional insured senior notes. The company also agreed to pay a termination fee to the senior lenders if the amount of the insured senior notes issued is less than $325 million, or if the commitment is terminated.

Potential next steps

If the facilities or sale do not close, MBIA said MBIA Insurance Corp. will not have sufficient liquid assets to pay the Zohar II claim. In addition, failure to maintain sufficient assets to readily pay other policyholder claims would likely result in MBIA Insurance Corp. being placed into a rehabilitation or liquidation proceeding or another action necessary to protect the interests of policyholders.

MBIA Insurance Corp. is in preliminary contingency planning discussions related to a potential rehabilitation proceeding in the event that the closings cannot occur or if it cannot otherwise restructure the Zohar II notes, the 8-K said.

Following the maturity of the Zohar II notes, the company said MBIA Insurance Corp. will evaluate strategic options and potential transactions that would maximize present value creation for the holders of its surplus notes.

Armonk, N.Y.-based MBIA is a holding company whose subsidiaries provide financial guarantee insurance and related reinsurance, advisory and portfolio services for the public and structured finance markets as well as asset management advisory services.

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