Moody”™s Investors Service last week downgraded MBIA Inc. and its subsidiary National Public Finance Guarantee Corp., while also placing the ratings of MBIA Insurance Corp. and its subsidiaries on review for a possible downgrade.
The ratings action came despite a $1.1 billion settlement reached between the Armonk-based bond insurer and securities firm Morgan Stanley Dec. 13 that effectively resolves a legal dispute over nearly $5 billion in insurance contracts that were made prior to the financial crisis.
The settlement represents a positive step for both Morgan Stanley and MBIA, the latter of which is currently in the midst of several lawsuits relating to the company”™s restructuring and to mortgage-backed securities that MBIA insured prior to the financial crisis.
Under the terms of the settlement, the Armonk-based MBIA Inc. will pay Morgan Stanley $1.1 billion, with both sides agreeing to terminate outstanding credit default swap protection that was bought from MBIA on commercial mortgage-backed securities (MBS) generated by Morgan Stanley.
Additionally, MBIA agreed to drop its MBS-related lawsuit against Morgan Stanley, and the latter removed itself from lawsuits initially brought by 18 financial companies against MBIA and against the New York State Department of Financial Services (formerly the Department of Insurance) regarding MBIA”™s planned restructuring.
Ratings actions taken by Moody”™s included lowering MBIA”™s rating from Ba3 to B2 and lowering National Public Finance Guarantee Corp.”™s rating from Baa1 to Baa2.
Moody”™s analysts expressed concerns that bulk settlements between MBIA and its various counter-parties could leave the company challenged to meet liquidity requirements, adding that the downgrade “reflects the increasing stress in the firm”™s wind-down operation.”
MBIA representatives confirmed the settlement with Morgan Stanley, but had no further comment relating to the settlement and could not be reached for further comment regarding the actions taken by Moody”™s.
Morgan Stanley and the state Department of Financial Services both said in statements that the settlement between MBIA and Morgan Stanley was a positive step.
