Buyout firm Warburg Pincus has agreed to invest $1 billion in MBIA Inc, bolstering the finances of the world's largest bond insurer amid concern about its ability to pay claims on faltering mortgage-backed bonds.
The news, announced by MBIA on Monday, lifted the company's sagging shares as much as 25 percent, before settling at $34.80, a 16 percent gain, in afternoon trading.
Jim Ryan, stock analyst at Morningstar Inc, said it is unclear whether the Warburg investment will be sufficient to ward off liquidity concerns.
It is dilutive to existing stockholders and whether it is enough is the big unknown at this time, Ryan said. It is a step in the right direction, but whether it is enough is something for the rating agencies to decide.
MBIA also said it would set aside reserves of $500 million to $800 million in the fourth quarter to bolster its balance sheet in the wake of continued deterioration in residential mortgage-backed securities.
The reserve reflects the company estimate of probable and estimable losses in the quarter, it said. Mark-to-market losses will be significantly greater in the fourth quarter than the third quarter, it added.
Armonk, New York-based MBIA said on December 6 it was looking at ways to shore up its capital base amid investor concern that it could face a severe liquidity crisis amid collapsing values for bonds backed by subprime mortgages.
MBIA said the Warburg investment will increase MBIA's already substantial capital and claims-paying resources. It said it continues to evaluate other ways to strengthen our capital position.
Warburg will initially invest $500 million by buying 16.1 million MBIA shares at $31 each. It will also receive warrants to purchase up to 8.7 million MBIA shares at $40 each.
MBIA said Warburg Pincus will execute the financing through direct purchase of stock and be a backstop for a rights offering for existing MBIA stockholders.
In addition to the stock purchase agreement, Warburg, a top buyout firm with more than $20 billion in assets under management, will nominate two new members to the MBIA board, which will expand to 13 members.
Mary Miller, director of fixed income at T Rowe Price Group Inc in Baltimore, said MBIA probably is setting the path for other stand-alone bond insurers.
Having one of those companies fail would be very, very bad for the markets, Miller said.
She said their principal asset is their AAA rating, something they want to preserve. She said Ambac Financial Group Inc is likely to take similar steps.
MBIA said its senior management will invest $2 million in its stock along with Warburg.
The stock purchase agreement requires regulatory approval under U.S. antitrust law.
MBIA shares, which traded around $65 for much of 2007, began falling in mid-October and closed at $27.42 on December 5, the day Moody's Investors Service warned that MBIA could need a capital infusion to support its premium Triple-A rating.
(Reporting by Dane Hamilton; editing by John Wallace/Tim Dobbyn)