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Rating Action:

Moody’s affirms MBIA’s ratings; outlooks changed to negative

17 December 2020


New York , December 17, 2020 - Moody's Investors Service, ("Moody's") has affirmed the senior unsecured debt rating of MBIA Inc. (MBIA) at Ba3 and the insurance financial strength (IFS) rating of National Public Finance Guarantee Corporation (National) at Baa2. Moody's also affirmed the Caa1 IFS rating of MBIA Insurance Corporation (MBIA Corp.). The outlook for the ratings of MBIA and National were changed to negative from stable, while the outlook for MBIA Corp. was changed to negative from developing.

Moody's will comment on the rating and outlook of MBIA Mexico, S.A. de C.V. (MBIA Mexico) in a separate press release.

RATINGS RATIONALE

RATING RATIONALE SUMMARY

The change in the rating outlook to negative for National and MBIA reflects continued uncertainty regarding ultimate losses on National's Puerto Rico exposures due to the economic and revenue disruptions in Puerto Rico caused by the coronavirus pandemic, which has also incrementally weakened the overall credit profile of the company's broader US public finance portfolio. In addition, National has continued to make large purchases of MBIA common stock for its investment portfolio, which are non-admitted assets for the calculation of the company's qualified statutory capital. In Moody's opinion, this capital allocation decision in the face of numerous uncertainties reflects the weak alignment of interests between MBIA's shareholders and its policyholders and creditors.

The change in MBIA Corp.'s rating outlook to negative reflects the significant uncertainty regarding the company's ability to realize sufficient recoveries on Zohar collateral to secure its longer-term solvency, despite the recent favorable court ruling in the company's litigation with Credit Suisse regarding its RMBS put-back claims.

RATING RATIONALE – National Public Finance Guarantee Corporation

National's Baa2 IFS rating (negative outlook) 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 substantial exposure to below investment grade credits (including Puerto Rico), which represented approximately 7.7% of its insured book (gross par plus accreted interest on capital appreciation bonds (CABs)) and 211% of qualified statutory capital at Q3 2020, as well as use of the firm's capital to buyback MBIA common stock, which weakens the company's asset quality and liquidity and reduces the benefits of portfolio amortization on capital adequacy. At 3Q 2020, National held more than 84 million MBIA shares with a current market value of approximately $620 million, representing more than 20% of National's total cash and invested assets (including non-admitted assets).

At Q3 2020, National had approximately $2.05 billion of gross par exposure to the debt securities of Puerto Rico issuers, with approximately 66% of this exposure to the Commonwealth of Puerto Rico's General Obligation (Ca negative) and Commonwealth guaranteed bonds and bonds issued by Puerto Rico Electric Power Authority (Ca negative). More than four years into the debt restructuring process, there continues to be significant uncertainty related to the ultimate losses arising from National's remaining Puerto Rico exposures. Moody's notes that the economic and revenue disruptions in Puerto Rico caused by the coronavirus pandemic have slowed the restructuring process and could result in a reduction in Puerto Rico's debt servicing capacity, and thus higher loss severity on debt insured by National.

RATING RATIONALE -- MBIA Inc.

The Ba3 senior unsecured debt rating (negative outlook) of MBIA reflects the credit profiles of its subsidiaries and its adequate liquidity profile stemming from the firm's significant level of liquid cash and invested assets held at the holding company level ($335 million at Q3 2020). Although we expect ordinary dividend payments from National to continue for at least the next couple of years, MBIA has been unable to receive funds from the tax escrow account due to losses arising from National's Puerto Rico exposures. The firm's debt burden and meaningful asset risks, a large share of which support its wind-down operations, remain a distinct weakness, though we note that 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 the tax escrow account and the significantly weaker credit profile of MBIA Corp.

RATING RATIONALE -- MBIA Insurance Corporation

MBIA Corp.'s Caa1 IFS rating (negative outlook) reflects the firm's weak (albeit improving) capital adequacy position and the uncertainty associated with the outcomes of several ongoing loss recovery efforts. MBIA Corp.'s liquidity position remains very weak, with liquid assets of approximately $129 million at Q3 2020, though we note that the recent favorable outcome in the firm's lawsuit against Credit Suisse should significantly bolster the company's liquidity position when finalized.

MBIA Corp.'s longer-term viability rests on its ability to recover the substantial majority of the firm's $1.1 billion of expected salvage recoverables, primarily relating to excess spread recoveries on second-lien RMBS securities, a mortgage loan put-back claim related to alleged breaches of representations and warranties by Credit Suisse on a legacy insured RMBS transaction and recoveries from sales of collateral backing the defaulted Zohar I and Zohar II collateralized loan obligation (CLO) transactions. 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.

On November 30, 2020, the Supreme Court of the State of New York announced its decision in MBIA Corp.'s case against Credit Suisse regarding mortgage loan put-back claims on a legacy second-lien RMBS transaction originated in 2007. Based on the 51.5% breach rate for the transaction determined in the ruling, MBIA Corp. would be awarded up to $680 million. The outcome will be accretive to MBIA Corp.'s capital adequacy and substantially boost its liquidity position, should it be finalized. Although Credit Suisse could appeal the decision and further delay the final judgment, we think the court's ruling is a favorable outcome for MBIA Corp. and positive for the firm's overall credit profile.

In contrast to the favorable outcome in the Credit Suisse litigation, however, MBIA Corp.'s asset recoveries related to the Zohar CLO defaults have been limited thus far. In the past four years, MBIA Corp. has recovered only a small portion of its claims payments, reflecting delays caused by litigation with the former collateral manager of the Zohar CLOs. MBIA Corp. has reduced its estimate of salvage recoverables related to the Zohar collateral in recent quarters due to bankruptcy filings and restructurings among certain Zohar portfolio companies, creating heightened levels of uncertainty regarding MBIA Corp.'s ability to realize sufficient recoveries on the remaining Zohar collateral to secure its longer-term solvency.

Moody's added that the ratings on MBIA Corp.'s surplus notes (Ca(hyb)) and preferred stock (C(hyb)) reflect their high expected loss content given the company's weak capital profile and the deeply subordinated nature of these securities.

According to Moody's, 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

The following factors could result in the stabilization of National's outlook: 1) Losses from exposure to Puerto Rico in line with our current LGD point estimates; and/or 2) improved risk-adjusted capital adequacy. Conversely, the following factors could result in a downgrade of National's rating: 1) developments in Puerto Rico result in losses that reduce the firm's qualified statutory capital by more than 25% over a twelve month period; 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 the stabilization of MBIA Corp.'s outlook: 1) improved capital adequacy and liquidity profile; 2) a reduction in exposure to large single risks; and 3) favorable final settlement of its RMBS put-back claims and 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; 3) a meaningful reduction in expected excess-spread recoveries on second-lien RMBS; and 4) 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; and

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

Outlook Actions:

MBIA Inc. – outlook to Negative from Stable

National Public Finance Guarantee Corporation – outlook to Negative from Stable

MBIA Insurance Corporation – outlook to Negative from Developing

The principal methodology used in these ratings was Financial Guarantors Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186098 . Alternatively, please see Rating Methodologies page on www.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 September 30, 2020, MBIA Inc. had consolidated gross par outstanding of approximately $64.6 billion (including accreted interest on CABs) and total claims paying resources at its operating subsidiaries of approximately of $4.2 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

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 ratings tab on the issuer/entity page for the respective issuer on www.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 entities or their 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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

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 www.moodys.com.

Please see www.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 ratings tab on the issuer/entity page on www.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

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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