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Rating Action:

Moody's changes outlook of MBIA Insurance Corp. to developing from negative; ratings affirmed

02 Dec 2016

New York, December 02, 2016 -- Moody's Investors Service, ("Moody's") has affirmed the insurance financial strength (IFS) rating of MBIA Insurance Corporation (MBIA Corp.) at Caa1, and changed the outlook to developing from negative. MBIA Corp., which is in run-off, is a wholly owned subsidiary of MBIA Inc. (senior debt at Ba1/negative). The rating action follows an anticipated improvement in the liquidity position of MBIA Corp., largely as a result of a financing facility to be provided by certain holders of MBIA Corp.'s outstanding surplus notes and MBIA Inc.

Given the de-linkage of MBIA Corp. from the rest of the MBIA entities (discussed below), the rating action on MBIA Corp. has no impact on the ratings of its parent, MBIA Inc., National Public Finance Guarantee Corporation (National - IFS rating A3/negative), its sister company which writes financial guaranty insurance in the US public finance market, or MBIA UK Insurance Limited (MBIA UK - IFS rating Ba2/review for upgrade), its UK-based subsidiary.

MBIA Mexico, S.A. de C.V. (MBIA Mexico) was not part of today's rating action. MBIA Mexico's IFS rating is currently Caa1/negative.

The rating action also has implications for the various transactions wrapped by MBIA Corp. as discussed later in this press release.

RATINGS RATIONALE

Moody's stated that today's affirmation of MBIA Corp.'s Caa1 IFS rating, and the outlook change to developing, from negative, reflects the increasing likelihood that MBIA Corp. will be able to fully meet its payment obligations related to an anticipated claim in January 2017 on approximately $770 million of Zohar II 2005-1 Limited (Zohar II) notes that it insures.

On 28 November 2016, MBIA Corp. announced that it had accepted a binding commitment letter (subject to certain conditions) from certain holders of its outstanding surplus notes to provide senior financing of up to $325 million and from its parent, MBIA Inc., to provide subordinated financing of $38 million. The funds will be used to pay an anticipated claim on its insurance policy insuring certain notes issued by Zohar II, which mature on 20 January 2017. In addition to the financing facility, MBIA Inc. has agreed to provide MBIA Corp. up to an additional $50 million of subordinated financing, if needed, to provide additional liquidity to the company.

Moody's notes that the proceeds from this financing facility, combined with MBIA Corp.'s existing cash on hand and approximately $347 million principal amount of Zohar II notes to be received from Assured Guaranty Corp. (AGC) in connection with the pending sale of MBIA UK to AGC, if executed successfully, will allow MBIA Corp. to fully satisfy its claims payment obligations related to a default of Zohar II.

Moody's notes that MBIA Corp. must receive various regulatory approvals and meet specific closing conditions on both the pending sale of MBIA UK to AGC and the establishment of the financing facility prior to 20 January 2017 for MBIA Corp. to close its liquidity gap. The inability of MBIA Corp. to close these transactions in a timely manner, for any reason, would likely result in regulatory intervention, which could result in a claims payment freeze, partial claims payments, or rehabilitation proceedings. To the extent this scenario occurs, the IFS rating of MBIA Corp. could be downgraded.

According to Moody's, there also remains significant uncertainty with respect to the market value of the collateral backing the Zohar transactions and the related recovery that MBIA Corp. can expect on the insured bonds, which could adversely impact the firm's capital adequacy. Moreover, Moody's believes MBIA Corp.'s liquidity position is likely to remain strained until a settlement is reached on certain RMBS put-back claims, which are currently in litigation. A settlement or legal judgment related to such claims on terms favorable to MBIA Corp. remains uncertain.

Moody's added that the ratings of MBIA Corp.'s preferred stock (C (hyb)) and surplus notes (Ca (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, and MBIA Corp.'s repayment of a loan from affiliate National. However, MBIA Corp.'s very weak credit profile could still adversely impact MBIA Inc., and to a lesser extent, National, through reputational damage caused by their affiliation with MBIA Corp.

RATING DRIVERS

The following factors could lead to a stabilization of the rating or an upgrade: 1) Significant improvement in capital adequacy and liquidity profile; 2) reduction in MBIA Corp.'s exposure to large single risks, including the Zohar II CLO notes; and 3) favorable settlement of outstanding RMBS put-back claims. Conversely, the following would place downward pressure on the rating: 1) Inability to complete announced liquidity raising initiatives (sale of MBIA UK and financing facility); 2) unfavorable settlement of outstanding RMBS put-back claims; 3) portfolio losses meaningfully in excess of current expectations; 4) meaningful reduction in expected excess-spread recoveries on second-lien RMBS; and 5) further deterioration in the company's liquidity profile.

The following ratings have been affirmed:

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

Outlook actions:

MBIA Insurance Corporation -- outlook changed to developing from negative

TREATMENT OF WRAPPED TRANSACTIONS

Moody's ratings on securities that are guaranteed or "wrapped" by a financial guarantor are generally maintained at a level equal to the higher of the following: a) the rating of the guarantor (if rated at the investment grade level); or b) the published underlying rating (and for structured securities, the published or unpublished underlying rating). Moody's approach to rating wrapped transactions is outlined in Moody's methodology "Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts" (December 2015).

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. [NYSE:MBI]. As of 30 September 2016, MBIA Inc. had consolidated net par outstanding of approximately $153 billion and qualified statutory capital at its subsidiaries of approximately of $4.2 billion.

The principal methodology used in these ratings was Financial Guarantors published in April 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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 - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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