Thu 11/03/2022 14:58 PM
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Relevant Documents:
Earnings Release
Selected Exposures

Given the substantial restructuring of MBIA/National Public Finance Guarantee’s Puerto Rico credits, the bond insurer has retained Barclays as an advisor as it explores strategic alternatives, including a possible sale of the company, CEO Bill Fallon said in a third-quarter earning call this morning.

Fallon reiterated the position that the Puerto Rico Electric Power Authority’s Title III bankruptcy case does not need to be resolved before a sale of the company can happen. He stated that the engagement of Barclays was driven by the resolution of the bulk of National’s exposures to Puerto Rico and not an approach by a potential buyer.

“As we have indicated for a while, we have now come to the conclusion that the Puerto Rico restructuring has been substantially completed at this point. I know we still have PREPA, but depending on how you want to estimate it, we’re probably 75% or 80% of our way through our large exposures,” he said. “And even with PREPA, given the back and forth in the negotiations and mediation sessions, there is at least a sense of the parameters around which that one might get settled.”

Fallon said the pendency of PREPA’s Title III case should not impede value maximization.

“So again, we don’t believe we have to wait,” Fallon said, noting that the company determined it was best for shareholders to pursue strategic alternatives now given that sales transactions can take some time to complete. “If things change we can always adjust our approach,” he added.

Fallon indicated that talks with potential buyers or interested parties have started in what he characterized as a “very traditional” M&A process that should be of substantial benefit for shareholders. No timeline has been established for completing the potential sale process and there can be no assurance that the process will result in a particular transaction or strategic outcome, he said.

The MBIA/National chief signaled that both strategic and financial buyers could be in play. He acknowledged some potential upside “synergy” in connection with a hypothetical acquisition by a strategic buyer such as Assured Guaranty.

The engagement of Barclays comes as National continues to decrease its gross par exposure to Puerto Rico, which totals $1.375 billion. More than half of that comprises $710 million in gross par outstanding at PREPA, which is the sole Puerto Rico debtor still subject to bankruptcy proceedings under Title III of PROMESA.

Fallon noted that the effective date remains pending for the Puerto Rico Highways and Transportation Authority plan of adjustment, which was confirmed by Title III Judge Laura Taylor Swain in October. “That’s hard to predict, but it wouldn’t surprise us if it occurs this month,” he said, noting that the issue was not discussed in Wednesday’s omnibus hearing.

Upon going effective, National will receive additional cash and newly issued HTA bonds and intends to make insurance payments in full that will extinguish its HTA exposure, Fallon said.

Turning to the remaining major Puerto Rico exposure, Fallon noted that mediation toward a PREPA plan of adjustment is ongoing in parallel to litigation brought by the PROMESA oversight board, which has filed a motion for summary judgment in its lawsuit challenging the security and recourse rights of the PREPA bonds.

Fallon noted that the current mediation period stretches back nearly six weeks to Judge Swain’s revised mediation order issued in late September. “What came out in court yesterday was that there hasn’t been a lot of interaction between the parties,” he said.

Fallon said Judge Swain indicated during the omnibus hearing that she wanted any proposed plan of adjustment filed by the oversight board by the court’s Dec. 1 deadline to have “real input” that would come from the mediation sessions. “So we expect there will be some type of interaction between now and then,” he said.

As of Sept. 30, National had sold all of the Puerto Rico general obligation bonds it received pursuant to the commonwealth plan of adjustment and approximately 55% of its GO contingent value instruments, or GO CVIs, according to MBIA’s chief financial officer, Anthony McKiernan. National also sold approximately 16% of its HTA CVIs during the quarter.

As of the end of the third quarter, National had sold approximately 35% of its PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. These sales monetized a portion of National’s salvage asset and reduced potential volatility and ongoing risk of remediation regarding the PREPA credit, according to MBIA’s 10-Q filing for the quarter.

The 10-Q provides an update on the status of the complaint filed by National in commonwealth court against the major banks that underwrote billions of Puerto Rico bond issues. National filed a motion for reconsideration of the Puerto Rico Supreme Court’s denial of its petition for certiorari. The motion was rejected on Oct. 14, and on Oct. 19 National filed a renewed motion for reconsideration and a motion seeking review of that motion by the whole of the Puerto Rico Supreme Court. Defendants have objected to both motions.

The 10-Q included the following summary of National’s exposures within the insured portfolio of the U.S. public finance insurance segment related to Puerto Rico as of Sept. 30:

National’s gross claims paid to date on Puerto Rico exposures since inception through Sept. 30 totaled approximately $2.3 billion, according to the CFO.

MBIA Inc. reported a consolidated net loss of $34 million, or negative $0.67 per share, for the third quarter of 2022 compared with a consolidated net loss of $123 million, or negative $2.49 per share, for the third quarter of 2021. The improved result versus last year’s third quarter was primarily attributable to a favorable variances of losses and loss adjustment expenses, or LAE, at MBIA Insurance Corp. and National.

The favorable comparison of losses and LAE for National was primarily because of lower Puerto Rico-related losses and LAE, with loss activity this quarter largely resulting from lower estimated values on National’s anticipated HTA recoveries, according to an earnings release.

McKiernan said loss and loss expense at National in the third quarter was primarily due to lower estimated prices on the HTA-related collateral it expects to receive in the fourth quarter.

According to the 10-Q, in formulating loss reserves for its Puerto Rico exposures, the company considers the following: environmental and political impacts on the island; litigation and ongoing discussions with creditors on the Title III proceedings; timing and amount of debt service payments and future recoveries; existing proposed restructuring plans or agreements; and deviations from these proposals in its probability-weighted scenarios.

For recoveries on paid Puerto Rico losses, the estimates include assumptions related to the following: economic conditions and trends; political developments; the company’s ability to enforce contractual rights through litigation and otherwise; discussions with other creditors and the obligors; any existing proposals; and the remediation strategy for an insured obligation that has defaulted or is expected to default.
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