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Rating Action:

Moody’s affirms MBIA’s Ba3 senior debt rating and IFS ratings of insurance subsidiaries; outlook changed to stable

22 June 2022


New York , June 22, 2022 – Moody's Investors Service ("Moody's") has affirmed the senior unsecured debt rating of MBIA Inc. (MBIA) at Ba3, the insurance financial strength (IFS) rating of National Public Finance Guarantee Corporation (National) at Baa2 and the IFS rating of MBIA Insurance Corporation (MBIA Corp.) at Caa1. The surplus notes rating of MBIA Corp. was downgraded to C(hyb) from Ca(hyb). The outlook for the ratings of MBIA, National and MBIA Corp. was changed to stable from negative.

RATINGS RATIONALE

RATING RATIONALE SUMMARY

The change in the rating outlook to stable for National and MBIA reflects reduced uncertainty regarding ultimate losses on National's Puerto Rico exposures. Following the expected restructuring of Puerto Rico Highway and Transportation Authority (PRHTA) bonds later this year, National will have less than $900 million of remaining Puerto Rico exposure, primarily to bonds issued by Puerto Rico Electric Power Authority (PREPA).

The change in MBIA Corp.'s rating outlook to stable reflects expected improvements in the firm's risk-adjusted capital adequacy as a number of large exposures mature during 2022. However, Moody's notes that MBIA Corp.'s policyholders' surplus remains just above minimum regulatory levels and the firm's longer-term solvency remains dependent on the outcome of the firm's asset recovery efforts.

The downgrade of MBIA Corp.'s surplus notes rating to C(hyb) reflects Moody's view that expected recovery rates of principal and accrued interest on these defaulted securities is likely to be lower than 35%.

RATING RATIONALE – National Public Finance Guarantee Corporation

National's Baa2 IFS rating reflects the insurer's sizable capital resources, the meaningful delinking from its weaker affiliates and the continued amortization of its insured portfolio, which gradually increases risk-adjusted capital adequacy over time (assuming a static capital position). Offsetting these strengths is National's run-off status, which results in a weak alignment of interests between shareholders and policyholders, its exposure to below investment grade credits (including Puerto Rico), which represented approximately 8.1% of its insured book (gross par plus accreted interest on capital appreciation bonds (CABs)) and 139% of qualified statutory capital at Q1 2022, as well as use of the firm's capital to purchase MBIA common stock, which weakens the company's asset quality and liquidity and reduces the benefits of portfolio amortization on capital adequacy. At 1Q 2022, National held more than 86 million MBIA shares with a market value of approximately $1 billion. National's MBIA Inc. common stock holdings are non-admitted assets for statutory accounting purposes and thus these funds are not considered to be available to pay claims.

At Q1 2022, National had approximately $1.5 billion of gross par exposure to the debt securities of Puerto Rico issuers (including accreted interest on CABs). Following the expected resolution of National's PRHTA exposures later this year, National's Puerto Rico exposure will be less than $900 million, with approximately 90% of this exposure represented by PREPA.

RATING RATIONALE -- MBIA Inc.

The Ba3 senior unsecured debt rating of MBIA reflects the credit profiles of its subsidiaries and its adequate liquidity profile stemming from the firm's liquid cash and invested assets held at the holding company level ($216 million at Q1 2022). We expect ordinary dividend payments from National to continue, but MBIA has been unable to receive funds from the tax escrow account due to losses arising from National's Puerto Rico exposures. MBIA's debt burden is slowly improving and the firm's debt service obligations are manageable over the next several years. The notching between MBIA Inc.'s senior debt rating and the IFS rating of its lead insurance subsidiary, National, is four notches, reflecting the group's high financial leverage, lower projected cash flows from National and the significantly weaker credit profile of MBIA Corp.

RATING RATIONALE -- MBIA Insurance Corporation

MBIA Corp.'s Caa1 IFS rating reflects the firm's improving capital adequacy position offset by the uncertainty associated with the outcomes of ongoing loss recovery efforts. MBIA Corp.'s liquidity has improved since the firm's $600 million settlement with Credit Suisse regarding RMBS put-back claims. At Q1 2022, MBIA Corp. had liquid assets of approximately $272 million.

MBIA Corp.'s longer-term viability rests on its ability to recover the substantial majority of the firm's $299 million of expected salvage recoverables, primarily relating to excess spread recoveries on second-lien RMBS securities, recoveries from sales of collateral backing the defaulted Zohar I and Zohar II collateralized loan obligation transactions and from purchasing MBIA Corp. wrapped securities as part of its loss mitigation strategies. The inability of MBIA Corp. to realize substantial recoveries from these efforts would likely result in regulatory intervention, which could result in a claims payment freeze, partial claims payments, or rehabilitation proceedings.

Moody's added that the C(hyb) ratings on MBIA Corp.'s surplus notes and preferred stock reflects our expectation that recovery rates on these securities are likely to be very low given their deeply subordinated status and the limited amount of capital resources available at the company.

Moody's notes that credit deterioration at MBIA Corp. has only a limited impact on the broader MBIA group given the substantial delinking following the removal of the cross-default provision with MBIA Inc.'s debt in 2012.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

National Public Finance Guarantee Corporation

Given National's business and financial profile as a run-off financial guarantor, its rating is unlikely to be upgraded. However, the following factors could positively influence the firm's credit profile: 1) Resolution of remaining Puerto Rico exposures in line with our current expectations; and 2) improved risk-adjusted capital adequacy. Conversely, the following factors could result in a downgrade of National's rating: 1) significant deterioration in the credit quality of its insured portfolio; 2) capital extraction in excess of the firm's ordinary dividend capacity without a commensurate reduction of insured risk; 3) significant additional purchases of MBIA common stock for its investment portfolio; and 4) provision of material capital support to MBIA Corp.

MBIA Inc.

The following factors could lead to an upgrade of MBIA's senior debt rating: 1) an upgrade of National; and/or 2) a significant reduction in adjusted financial leverage. Conversely, the following factors could result in a downgrade: 1) a downgrade of National; and/or 2) constrained liquidity at the holding company with visible projected cash inflows and existing liquid assets covering less than two years of debt service.

MBIA Insurance Corporation

The following factors could result in an upgrade of MBIA Corp.'s ratings: 1) improved capital adequacy and liquidity profile; 2) a reduction in exposure to large single risks; and 3) substantial recoveries from Zohar collateral sales. Conversely, the following factors could result in a downgrade: 1) failure to secure substantial recoveries on Zohar collateral; 2) portfolio losses meaningfully in excess of current expectations; and 3) deterioration in the company's liquidity profile.

RATING LIST

The following ratings have been affirmed:

MBIA Inc. – senior unsecured debt at Ba3;

National Public Finance Guarantee Corporation – insurance financial strength at Baa2;

MBIA Insurance Corporation – insurance financial strength at Caa1, non-cumulative preferred stock at C(hyb) and preferred stock at C(hyb);

The following rating has been downgraded:

MBIA Insurance Corporation – surplus notes to C(hyb) from Ca(hyb);

Outlook Actions:

MBIA Inc., National Public Finance Guarantee Corporation and MBIA Insurance Corporation – outlooks to Stable from Negative.

The principal methodology used in these ratings was Financial Guarantors Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65414 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

MBIA Insurance Corporation and National Public Finance Guarantee Corporation are financial guaranty insurance companies domiciled in New York State and are wholly owned subsidiaries of MBIA Inc. As of March 31, 2022, MBIA Inc. had consolidated gross par outstanding of approximately $50 billion (including accreted interest on CABs) and total claims paying resources at its operating subsidiaries of approximately of $3.7 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

James Eck
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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