Investment Fund Files Suit MBIA restructuring Unwind

The Delaware Chancery Court is requested to cancel an agreement facilitated by the New York State Insurance Department to financial guarantee insurer MBIA Inc. to split its portfolio of $ 537 billion of U.S. municipal securities of its most troubled financing structure, asset management and international companies.

As part of a lawsuit filed by the investment company Third Avenue Management LLC, MBIA (NYSE: MBI) is accused of having defrauded the holders of the insurance company of the debt. MBIA already faced a putative class action filed by a group of hedge funds - including those managed by Aurelius Capital Partners LP and Fir Tree Partners - the U.S. District Court in New York on behalf of equity securities that guaranteed by MBIA.

In February, MBIA announced that it would convert subsidiary MBIA Insurance Corporation of Illinois National Public Finance Corp. as collateral, of $ 4.98 billion entity that inherited the company book of municipal securities, including those absorbed the competitor last year by the Financial Guaranty Insurance Co. in a "cut" reinsurance transaction. MBIA is structured and other businesses remained under the MBIA Corp. (NYSE: MBI) holding.

But the reorganization of the owners left MBIA surplus notes "improperly denied the benefit of our investments - namely, a well-capitalized insurance company that is able to conduct a profitable business of municipal bond insurance," according to Third Avenue President Martin J. Whitman.

"MBIA has stripped that firms from home and left us with a run-off portfolio is probably unnecessary. Ironically, MBIA is now on the market trying to raise capital for the new entity, despite Third Avenue the bad experience with MBIA last capital raise, which gave rise to this dispute, "Whitman said.

In his complaint, Third Avenue Funds in February 2008 stipulates the purchase of notes issued by the surplus underwriting subsidiary MBIA Insurance Corp., which it said was based on the company plan to recapitalize the insurer next billion impairment losses on written guarantees for structured finance obligations, many credit derivatives in the form.

Third Avenue is from MBIA betrayed the obligations of holders of the note by the transfer of $ 5 billion cash and internal efficiency of public finance in MBIA Illinois businesses, which shall be obligations of the surplus notes. Under the agreement, MBIA paid a premium of $ 2.89 billion to the National reinsure the policies covered by reinsurance agreements and the sale, and capitalization of the new entity with a dividend of $ 2, 09 billion and the return of capital. National has also issued the second policy to pay for those covered by reinsurance and the sale, with the Bank of New York Mellon, acting as trustee of insurance.

"We sold the MBIA surplus notes, then to our surprise and distress, stripped away the major assets as well as the only concern of the operations within MBIA Insurance Corp., said Mr. Whitman, the portfolio management exchange traded Third Avenue Value Fund (NASDAQ: TAVFX). "This is wrong and a big disappointment for us, especially after we went to bat for them with our portfolio and more."

For its part, MBIA maintains all its actions were proper and approved by the New York State Insurance Department and the Illinois Division of Insurance. In a statement by e-mail, CEO Jay Brown of MBIA said the complaint claims were "unfounded" and that MBIA will vigorously defend the lawsuit.

"We have met all the terms and conditions of their investment. All payments on the surplus notes were, and, subject to regulatory approval, will continue to be made on time and in full," said Brown. "Our transformation has not been a surprise for them, as I have been to all stakeholders because I returned a year ago that our goal was to separate our municipal structure and business."

Should we go to trial, the complaint could set a precedent for changes taking place in the market for financial guarantees. As MBIA, Ambac Financial Group seeks to launch a new subsidiary that will focus solely on public finances (BestWire, Feb. 26, 2009). The company has operated Doug Renfield-Miller to implement the new financial guarantee Everspan recapitalized Corp., formerly known as Connie Lee Insurance Co., and hopes to win freshly minted investment grade rating of Ambac unit would return heart of its core business of insuring municipal bond obligations.

(By RJ Lehmann, director of the Washington office: raymond.lehmann @ ambest.com)


Copyright (C) 2009 by A. M. Best Company, Inc.