It's like a doctor telling a patient with a bowling ball sized hole in his abdomen ..."Look I just got a access to full 20+ pints of blood, you'll be fine! We'll work on closing up the gapping hole later."
contingent surplus note (CSN)
Definition
Contingent capital mechanism by which a US insurance company may ensure availability of cash in case it suffers a catastrophic loss. In this arrangement, the insurance company establishes a trust that sells its own promissory notes (called CSN trust notes, which pay above-market interest rates) to investors and places the sales-proceeds in liquid securities such as Treasury bonds. When the insurance company requires funds, it issues its promissory notes (called surplus notes, which are used for redeeming CSN trust notes upon their maturity) to the trust in exchange for the securities and converts them to cash. Surplus notes (like loans) increase the insurance company's assets but (unlike loans) do not increase its liabilities because (under US accounting rules) they are regarded as policyholders' surplus.
Raising $1 billion of new capital with surplus notes.
Wikipedia: A Surplus note is a bond issued by an insurance company. These securities are subordinated obligations, and fall at the very bottom of the operating insurance company's capital structure. They are issued primarily by mutual insurance companies, which are not public and owned instead by their policy holders. Surplus notes are debt-like in that they pay a coupon and have a finite maturity. However, in many cases, state insurance regulators have allowed insurance companies to classify the capital raised via surplus notes as “surplus” (which is the statutory equivalent of equity), because surplus note holders are last in line to make a claim on the company's assets in a default scenario, much like where equity holders reside in a public company. The motivation for mutual companies to issue these instruments was to raise surplus (or equity) in response to new risk-based capital guidelines developed in the early 1990s. Because mutual companies are owned by policyholders, not shareholders, there was no alternative method to raise surplus or equity. While surplus note holders have last claim on the assets of the operating insurance company, it is important to realize that this claim is at the operating company level, which is still ahead of holding company obligations.
MBI now has a market cap of just $1.5 billion. Sounds like an innovative form of death spiral financing to me.
What interest rate will surplus note holders require? 10%+
For a company that can't sell new premium? Equity wipe out.
Now the question is just how expensive will these surplus notes be. The second question is why keep a dividend at all. Sort of expected something along these lines, ie new expensive capital plus get rid of dividend. The consequesnse of failure there are just to scary. So the comapny suruvives and with it the financial system, but life sucks for existing shareholders. Same basic analysis holds for the other monolines (ABK, MTG, PMI)
Way OT - but i learned about SRS on this blog so I will send up a balloon. Normally when I make a 40% return in 3 weeks I consider selling and going to drink beer. Anyone have an idea on how high SRS could go? Because i'm leaning into the beer for lunch theory.
The number of stocks that have completely broken from a technical perspective is amazing. MBI was trading up around $70 a share up until October.
It is now below $15.
Some other stocks on my short list have completely wet the bed, including Capitol None and Illinois Tool Works.
I wish I had bought more puts.
Bears are dancing in the end zone as the bulls lay stunned on the sidelines ...
Hoo boy! When I heard surplus note, I just gasped. This company is on the verge of BK. Who the HELL would buy a surplus note from these guys.
And what about current stock holders? They're really getting the shaft. MBIA just put them $1B further back from getting a penny if MBIA goes teets up.
you guys are quick on the comments today, my little joke was already covered many times over before I could hit submit
I think they don't cut the dividend completely because it would kill the stock and cause another problem. And the dividend at the new rate only costs ~90 million a year, not bad when you can raise a billion easily.
If anyone thinks shareholders in MBIA are alone in their problems, think about all those retired folks who thought they could bank on a AAA rated munis to carry them through their golden years. With municipal tax bases shrinkring, muni holders will be really worried about the marketability of their holdings if the insurance is from MBIA.
it was idoc. needless to say i also owe idoc a beer...
I hereby call on all owners of SRS who learned about it on this board (as I did) to pony up $60 of those profits for a subscription to the new newsletter (as I will). Oh, and a few bucks more to buy Idoc a beer if and when we ever meet him.
My only regret is trying to "scale into" SRS rather than just holding my nose and jumping in whole-hog (or whole-Mortgage-Pig, as the case may be). Ah well, +40% is still +40%. Tough to argue with that!
Someone around these parts mentioned they thought SRS could go to $140. I forget which person. I owe them a beer, theoretically.
12th percentile | 01.09.08 - 11:26 am | #
...............
it was idoc. needless to say i also owe idoc a beer...
nades
thanks guys. its nice to be remembered. i too was excited to see SRS hit 140 this AM. i will only say this. i like shorting vs. puts only b/c its takes the variable of timing out of the equation. i have been short financials, HB's, CRE for over a yr and yeah, i oftentimes think about taking it all off the table especially during the short squeezes. i have not so far and i honestly will tell you my portfolio is up 3.8x at this moment which would pay of my mortgage and probably allow me to retire although i still have 3 young kids and i'm in my late 40's. i've stuck with my convictions, the majority of which i derive from info on this site. i truly think we're only in the first inning with CRE. i even added GGP and MPG to my SRS yesterday.
for those of you who remembered my recommendation to short GRMN a month or so back, well today is the day!!! in all fairness Denninger alerted me to this even though he himself missed it.
u guys are all the best! seriously. i learn tons from all of u, distill the info my brain, and act accordingly, while not letting the MSM or pigman squeezes shake me out.
So they're raising capital equal to 2/3 of their current capital, and doing it with junk bonds. While their equity already yields 7.70%.
Their largest shareholders right now are Wellington and...GS, the latter of "We're great traders (Alpha Fund) and are short subprime ($75B in L3 assets)."
So I guess that original $500 million of equity at $31/share that Warburg put in a month ago isn't faring so well... seeing as the stock's down to $12.50.
Well at least it'll serve as a great hedge for Warburg... against any of those pesky 'ole capital gains, that is.
Before I start sounding like a naive bull, I closed out my MBI puts today before the Buffett rumor, although it was a modest position (unfortunately).
First, MBI consists of a holding company which owns state licensed insurance companies. MBI is AA rated and the monoline insurers owned by MBI are AAA rated.
They need to maintain the AAA at the insurance sub level, so the holding company dividend cut doesn't relate directly to the insurance subs.
The surplus notes are a good idea if they can sell them. Per the WSJ, they could't sell them at 12% but think they can at 15%. Note that the surplus notes are a much better bet then holding company debt.
The Buffett rumor has some substance, but the idea that mbi common shareholders will get a deal doesn't strike me as likely. He has said he likes the muni portion of the business but not the structured finance. He also doesn't like the business if it involves competition and historically small premiums based on competition from pseudo AAA competitors.
In addition, BRK just did its first muni deal for 26bp on an existing NY bond issue. There may be a lot of people that hold muni portfolios that would want to insure their munis for 25bp, even if they have already been insured by current insurers who have lost their rating or may lose their rating. I really have no idea, but going back for additional credit enhancement with a true AAA may be a good value for some holders, if the frictional costs of actively managing their existing portfolio or increased diversification are higher.
The possibilities include reinsurance on the muni portion of the monoline portfolio, but I don't know if there are sufficient reserves to make this economically doable. This would free up surplus to support the problem areas.
In addition, they could restructure the companies. The NY regulator was interviewed in today's NYTs. It sounds like he would do whatever it takes to provide a viable credit enhancement market.
Finally, holders of munis don't really have a problem if they have decent credit quality and diversification. The historical default rate is very low.
Depending on developments, I will be looking at buying additional puts. I suppose overthinking these things is counterproductive, but it really is quite complicated, and the assumption that the statutory insurers are in the same position as the holding company is not strictly accurate and can lead to faulty conclusions.
Probably everyone has finished with this comment section, but thats my personal opinion anyway.
$1B? What's that--1% of their exposure? Peanuts!! A day's worth of downgrades.
Surplus note--is that something like commodity cheese?
It's just a flesh wound!
Does that mean they aren't meeting them now and are just getting a pass?
Raising capital in this case probably means getting the government to covertly buy the surplus notes from it.
It's like a doctor telling a patient with a bowling ball sized hole in his abdomen ..."Look I just got a access to full 20+ pints of blood, you'll be fine! We'll work on closing up the gapping hole later."
contingent surplus note (CSN)
Definition
Contingent capital mechanism by which a US insurance company may ensure availability of cash in case it suffers a catastrophic loss. In this arrangement, the insurance company establishes a trust that sells its own promissory notes (called CSN trust notes, which pay above-market interest rates) to investors and places the sales-proceeds in liquid securities such as Treasury bonds. When the insurance company requires funds, it issues its promissory notes (called surplus notes, which are used for redeeming CSN trust notes upon their maturity) to the trust in exchange for the securities and converts them to cash. Surplus notes (like loans) increase the insurance company's assets but (unlike loans) do not increase its liabilities because (under US accounting rules) they are regarded as policyholders' surplus.
You'd have to be a complete fool to buy MBIA paper right now...
word of the day
Collusion
Collusion - Wikipedia, the free encyclopedia
How many triple A companies cut their dividends and attempt to raise cash multiple time?
I thought only those with MUCH lower ratings had to resort to those tactics...
It has a Triple A rating now? WTF?
Raising $1 billion of new capital with surplus notes.
Wikipedia: A Surplus note is a bond issued by an insurance company. These securities are subordinated obligations, and fall at the very bottom of the operating insurance company's capital structure. They are issued primarily by mutual insurance companies, which are not public and owned instead by their policy holders. Surplus notes are debt-like in that they pay a coupon and have a finite maturity. However, in many cases, state insurance regulators have allowed insurance companies to classify the capital raised via surplus notes as “surplus” (which is the statutory equivalent of equity), because surplus note holders are last in line to make a claim on the company's assets in a default scenario, much like where equity holders reside in a public company. The motivation for mutual companies to issue these instruments was to raise surplus (or equity) in response to new risk-based capital guidelines developed in the early 1990s. Because mutual companies are owned by policyholders, not shareholders, there was no alternative method to raise surplus or equity. While surplus note holders have last claim on the assets of the operating insurance company, it is important to realize that this claim is at the operating company level, which is still ahead of holding company obligations.
MBI now has a market cap of just $1.5 billion. Sounds like an innovative form of death spiral financing to me.
What interest rate will surplus note holders require? 10%+
For a company that can't sell new premium? Equity wipe out.
I'd want a whole lot more than 10% to buy those. Jesus these guys are totally delusional!
Now the question is just how expensive will these surplus notes be. The second question is why keep a dividend at all. Sort of expected something along these lines, ie new expensive capital plus get rid of dividend. The consequesnse of failure there are just to scary. So the comapny suruvives and with it the financial system, but life sucks for existing shareholders. Same basic analysis holds for the other monolines (ABK, MTG, PMI)
Way OT - but i learned about SRS on this blog so I will send up a balloon. Normally when I make a 40% return in 3 weeks I consider selling and going to drink beer. Anyone have an idea on how high SRS could go? Because i'm leaning into the beer for lunch theory.
The number of stocks that have completely broken from a technical perspective is amazing. MBI was trading up around $70 a share up until October.
It is now below $15.
Some other stocks on my short list have completely wet the bed, including Capitol None and Illinois Tool Works.
I wish I had bought more puts.
Bears are dancing in the end zone as the bulls lay stunned on the sidelines ...
rich,
Hoo boy! When I heard surplus note, I just gasped. This company is on the verge of BK. Who the HELL would buy a surplus note from these guys.
And what about current stock holders? They're really getting the shaft. MBIA just put them $1B further back from getting a penny if MBIA goes teets up.
Death spiral financing puts it just about right.
Cheers,
anyone going to buy some of these notes?
12th percentile -
It's never a bad idea to take money off the table and put it safely in cash, where the pigmen cannot touch it.
I'm on the conservative side, though. Letting your profits run is one of the hardest things to get right, IMO.
I'd like to buy one on Ebay next year to put on my wall.
you guys are quick on the comments today, my little joke was already covered many times over before I could hit submit
I think they don't cut the dividend completely because it would kill the stock and cause another problem. And the dividend at the new rate only costs ~90 million a year, not bad when you can raise a billion easily.
Now we'll see how tight the credit market is.
w,
ROFL.
Cheers,
Someone around these parts mentioned they thought SRS could go to $140. I forget which person. I owe them a beer, theoretically.
It's never a bad idea to take money off the table and put it safely in cash, where the pigmen cannot touch it.
Stop lossed and going for beer and wings. And with this Al Gore weather I may have to string up the hammock and take a nap once I'm done.
Reading the terms, it appears to me to be a death-spiral convert.
If that's the case, they are finished.
Is it time for a corporate "Darwin Award" ? I nominate Conjure Bag as referee.
Tom,
I second the motion!
Someone around these parts mentioned they thought SRS could go to $140. I forget which person. I owe them a beer, theoretically.
12th percentile | 01.09.08 - 11:26 am | #
...............
it was idoc. needless to say i also owe idoc a beer...
(also)
interesting article in alphaville:
FT Alphaville » Blog Archive » 25 CDOs to meet their maker; billions poised to liquidate?
looks like there's a sea of change in super-senior holders (monoliners in many cases) whether to liquidate CDOs or not
"Is it time for a corporate "Darwin Award" ?"
Love the idea....
Where was I when idoc said that! Now I need a beer.
Where is IDOC? guy/gal like that shouldn't have a day job.
IDOC, I owe you a beer.
Man, AAA isn't what it used to be!
I guess "containment" has failed yet again! How "surprising" - I bet "nobody could have predicted this."
If anyone thinks shareholders in MBIA are alone in their problems, think about all those retired folks who thought they could bank on a AAA rated munis to carry them through their golden years. With municipal tax bases shrinkring, muni holders will be really worried about the marketability of their holdings if the insurance is from MBIA.
Synonyms for surplus
Similarity of adj surplus
1 sense of surplus
Sense 1:
excess, extra, redundant, spare, supererogatory, superfluous, supernumerary, surplus
unnecessary (vs. necessary), unneeded
it was idoc. needless to say i also owe idoc a beer...
I hereby call on all owners of SRS who learned about it on this board (as I did) to pony up $60 of those profits for a subscription to the new newsletter (as I will). Oh, and a few bucks more to buy Idoc a beer if and when we ever meet him.
My only regret is trying to "scale into" SRS rather than just holding my nose and jumping in whole-hog (or whole-Mortgage-Pig, as the case may be). Ah well, +40% is still +40%. Tough to argue with that!
Someone around these parts mentioned they thought SRS could go to $140. I forget which person. I owe them a beer, theoretically.
12th percentile | 01.09.08 - 11:26 am | #
...............
it was idoc. needless to say i also owe idoc a beer...
nades
thanks guys. its nice to be remembered. i too was excited to see SRS hit 140 this AM. i will only say this. i like shorting vs. puts only b/c its takes the variable of timing out of the equation. i have been short financials, HB's, CRE for over a yr and yeah, i oftentimes think about taking it all off the table especially during the short squeezes. i have not so far and i honestly will tell you my portfolio is up 3.8x at this moment which would pay of my mortgage and probably allow me to retire although i still have 3 young kids and i'm in my late 40's. i've stuck with my convictions, the majority of which i derive from info on this site. i truly think we're only in the first inning with CRE. i even added GGP and MPG to my SRS yesterday.
for those of you who remembered my recommendation to short GRMN a month or so back, well today is the day!!! in all fairness Denninger alerted me to this even though he himself missed it.
Idoc
If you are ever in Albany, NY let me know.
I'll buy you several beers and also hook up your kids with whatever they choose to drink (Maker's?)
thanks again. I'm pretty conservative and won't touch shorts but this seemed like a no brainer.
idoc, I'd like to add my thanks. I learned of and established a position in SRS cause of the discussion on these boards.
u guys are all the best! seriously. i learn tons from all of u, distill the info my brain, and act accordingly, while not letting the MSM or pigman squeezes shake me out.
So they're raising capital equal to 2/3 of their current capital, and doing it with junk bonds. While their equity already yields 7.70%.
Their largest shareholders right now are Wellington and...GS, the latter of "We're great traders (Alpha Fund) and are short subprime ($75B in L3 assets)."
So I guess that original $500 million of equity at $31/share that Warburg put in a month ago isn't faring so well... seeing as the stock's down to $12.50.
Well at least it'll serve as a great hedge for Warburg... against any of those pesky 'ole capital gains, that is.
Reversal in the monolines on (yet another) Buffett rumor.
Buffett rumors are the refuge of the long and lugging.
Random thoughts....
Before I start sounding like a naive bull, I closed out my MBI puts today before the Buffett rumor, although it was a modest position (unfortunately).
First, MBI consists of a holding company which owns state licensed insurance companies. MBI is AA rated and the monoline insurers owned by MBI are AAA rated.
They need to maintain the AAA at the insurance sub level, so the holding company dividend cut doesn't relate directly to the insurance subs.
The surplus notes are a good idea if they can sell them. Per the WSJ, they could't sell them at 12% but think they can at 15%. Note that the surplus notes are a much better bet then holding company debt.
The Buffett rumor has some substance, but the idea that mbi common shareholders will get a deal doesn't strike me as likely. He has said he likes the muni portion of the business but not the structured finance. He also doesn't like the business if it involves competition and historically small premiums based on competition from pseudo AAA competitors.
In addition, BRK just did its first muni deal for 26bp on an existing NY bond issue. There may be a lot of people that hold muni portfolios that would want to insure their munis for 25bp, even if they have already been insured by current insurers who have lost their rating or may lose their rating. I really have no idea, but going back for additional credit enhancement with a true AAA may be a good value for some holders, if the frictional costs of actively managing their existing portfolio or increased diversification are higher.
The possibilities include reinsurance on the muni portion of the monoline portfolio, but I don't know if there are sufficient reserves to make this economically doable. This would free up surplus to support the problem areas.
In addition, they could restructure the companies. The NY regulator was interviewed in today's NYTs. It sounds like he would do whatever it takes to provide a viable credit enhancement market.
Finally, holders of munis don't really have a problem if they have decent credit quality and diversification. The historical default rate is very low.
Depending on developments, I will be looking at buying additional puts. I suppose overthinking these things is counterproductive, but it really is quite complicated, and the assumption that the statutory insurers are in the same position as the holding company is not strictly accurate and can lead to faulty conclusions.
Probably everyone has finished with this comment section, but thats my personal opinion anyway.