Subs: Tender Completed, Default Notice Issued

There are a few moving parts here so lets look…first the news:

Bank of America Corporation (“Bank of America”) announced today that it has completed its previously announced offer to purchase for cash (the “Tender Offer”) any and all of the outstanding 5.70% Senior Notes due 2034 (the “Notes”) which were issued by MBIA Inc., a Connecticut corporation (“MBIA”), under an indenture dated November 24, 2004 (the “Indenture”).

Bank of America said that, as of the expiration of the Tender Offer, it received tenders from holders of approximately $136 million in aggregate principal amount of the Notes and that Blue Ridge Investments, L.L.C. (“Blue Ridge”), a wholly owned subsidiary of Bank of America, has accepted for purchase and paid for all such tendered Notes.

Bank of America also announced that, in a letter to MBIA and the trustee for the Notes, Blue Ridge has issued a notice of default under the Indenture caused by MBIA’s violation of its covenants under the Indenture through, among other things, the purported adoption of a proposed amendment in violation of the terms of the Indenture.

Now, what does this mean? Here is the default provision from the Indenture. Applicable section bolded:

MBIA Indenture (click to open pdf)

SECTION 501. Events of Default.

“Event of Default”, wherever used herein with respect to the Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and such default continues for a period of 30 days; or
(2) default in the payment of the principal of or premium, if any, on any Security of that series at its Maturity; or
(3) default in the performance, or breach, of any covenant or warranty of the Company in respect of the Securities of that series (other than a covenant or warranty a default in the performance of which or the breach of which is specifically dealt with elsewhere in this Section), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or
(4) the entry by a court having jurisdiction in the premises of a decree or order for relief in respect of the Company or any Principal Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or
(5) the commencement by the Company or any Principal Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law; or
(6) any other Event of Default specified with respect to Securities of that series as contemplated in Section 301.

SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in Section 501(4) or 501(5)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series may declare the principal amount (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(4) or 501(5) with respect to Securities at the time Outstanding occurs, the principal amount on all the Securities shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable.

It seems that $BAC is claiming the consent $MBI obtained was a breach and therefore causes a default. If it causes a default, $BAC can demand full payment on the notes immediately. Now, as of the end of Q3 $MBIA has ~$330M of cash at the holding co. level. They bought back $170M last month as part of their consent agreement. Losing this battle would effectively leave the holding co. insolvent barring a cash injection from somewhere.

That would be very, very bad for $MBI. Further, $BAC could seek an injunction on the completion of MBI’s consent until the matter is adjudicated which effectively leaves MBI in limbo now and takes away a significant bargaining chip they one had in settlement negotiations.

Now, the other side of the coins is, based on MBIA’s press release:

MBIA Inc. Announces the Successful Completion of its Consent Solicitation Relating to the Indentures Governing Its 6.40% Senior Notes Due 2022, 7.00% Debentures Due 2025, 7.15% Debentures Due 2027, 6.625% Debentures Due 2028 and 5.70% Senior Notes Due 2034

ARMONK, N.Y.–(BUSINESS WIRE)– MBIA Inc. (the “Company” or “MBIA”) (NYSE: MBI) announced today that it has successfully completed its consent solicitation resulting in the amendments to indentures governing its 6.40% Senior Notes due 2022, 7.00% Debentures due 2025, 7.15% Debentures due 2027, 6.625% Debentures due 2028 and 5.70% Senior Notes due 2034 (the “Notes”) described in the Company’s consent solicitation statement dated November 7, 2012 (the “Consent Statement”).

The amendments substitute one of the Company’s subsidiaries, National Public Finance Guarantee Corporation, for another subsidiary, MBIA Insurance Corporation, in the definitions of “Restricted Subsidiary” in the Indenture, dated as of August 1, 1990 (the “1990 Indenture”), and “Principal Subsidiaries” in the Senior Indenture, dated as of November 24, 2004 (the “2004 Indenture”), pursuant to which the Notes were issued.

MBIA received the consents of holders as of the record date of a majority in principal amount of all outstanding Notes under the 1990 Indenture voting as a single class and from holders as of the record date of a majority in principal amount of the outstanding 5.70% Senior Notes due 2034 issued under the 2004 Indenture, prior to the expiration time of the consent solicitation. As a result, MBIA and The Bank of New York Mellon, as trustee, have entered into supplemental indentures, which effect the above amendments to the 1990 Indenture and the 2004 Indenture described in the Consent Statement.

MBIA has made cash payments of $10.00 for each $1,000 in aggregate principal amount of Notes for which a consent was provided prior to the expiration time of the consent solicitation.

Deutsche Bank Securities Inc. acted as solicitation agent in connection with the consent solicitation.

MBIA also announced that it has repurchased approximately $170 million of outstanding principal amount of Notes issued under the 2004 Indenture in privately negotiated reverse inquiry transactions directly from holders as of the record date that had consented pursuant to the consent solicitation described above. MBIA has previously disclosed that it may repurchase its debt from time to time in the open market or in private transactions.

It would seem as though MBIA received consent then repurchased the bonds. If that is in fact the case, then it would seem they would prevail here (we can’t be sure until details of the transaction are released).

Now, BAC may know this and it may not matter. With MBI holding co. low on cash, just having this in court is going to cause a liquidity squeeze because they are going to have to reserve against a possible negative outcome. It would seem two out of three outcomes here are bad for MBIA.

1- they lose the matter

2- the matter is tied up in court for months meaning they cannot continue with Consent action and face possible liquidity issues

3- they win in court

I think this is simply another negotiating tactic for $BAC. They are squeezing MBIA and will drop the default notice (it can be retracted) as part of settlement negotiations. This would also further stand to muddle and final settlement number amount that could be tied directly to “loan put backs” as BAC would be able to say significant portions were due to forgiveness of defaults notices and debt forgiveness.




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