Monday, January 29, 2007

Calls of Note Part 3

Couple of interesting comments on MBIA (NYSE:MBI) from tier-1 firms:

- Morgan Stanley notes that in the last minutes of the trading day on Friday, Bloomberg published a story suggesting MBIA will announce a settlement with regulators today, January 29. The article indicates MBIA will pay only the previously reserved for $75 million in fines and penalties to settle all AHERF-related issues, but would leave an independent consultant at the company to further
investigate potential wrongdoing at Capital Asset. MBIA has not commented on the proposed settlement.

A regulatory settlement, as proposed, would be a clear positive for the stock as it would remove significant uncertainty. It would also enable the company to begin repurchasing shares (up to $1 billion). Investors will finally be able to focus on the merits of the underlying fundamentals of the business. However, given tight credit spreads, only single-digit book value growth, and downward pressure on new business written, the firm does not believe the fundamentals are all that strong at present.

If this proves accurate, they would expect the stock to get a sharp short-term lift on the back of heavy short covering. There are more than 20 million shares short, representing 15% of the total.
If the MBI shares rally materially on the announcement, the firm would recommend reducing one's position in the stock.

- Deutsche Bank thinks that should MBIA settle with the Securities and Exchange Commission (SEC) and other regulators today, the stock could get a lift. Some investors that are short the stock may decide to cover, given that the investigations did not lead to MBIA losing its triple A ratings. MBIA is one of the most heavily shorted stocks in the S&P 500. Also, the company is likely to resume repurchasing shares in earnest. They estimate MBIA's excess capital has increased to $1.8 billion. According to news reports on Friday, January 26, MBIA could settle with the SEC as early as today for $75 million, which is the amount the company reserved in November 2005. Firm believes the settlement is likely, given that the company suddenly postponed its earnings release the day before the planned release date and could not provide an explanation for the change.

DB based their $79 target price on 1.45 times projected 4Q'07 book, which is at a discount to the average of 1.5 since the management changes in 1999.

Notablecalls: Having found myself in similar situations, I feel for the shorts. Not a nice way to spend a weekend. Expect a sharp move.

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