JP Morgan is making a huge call on MBIA Inc. (NYSE:MBI), downgrading the stock to Underweight from Neutral:
We are downgrading MBIA to Underweight, as we believe ultimate CDO, RMBS and CMBS related losses will eventually overwhelm capital, as the company continues to operate in run-off. We believe recent accounting to record a $1.1B recovery from a law suit that is uncertain, in conjunction with the impact of FAS 157, has skewed GAAP earnings and book value to represent a company that appears to be stabilizing. We calculate tangible book value (or deficit rather) at June 30, adjusted for the $1.1B estimated law suit gain and FAS 157, was ($40.22) per share. Although we believe it will be some time before cash at the HoldCo runs out, it is difficult to envision a scenario where there is much capital remaining for shareholders given expected future losses at the consolidated operating company.
Accounting for future legal recoveries appears aggressive given uncertainty of outcome. MBI posted a $1.1B ($3.50/shr after tax) reserve release on the expected recoveries from its lawsuits against Countrywide and ResCap. We have no doubt the company believes its claim is valid, but to book a gain of such magnitude for a suit that will last at least three years appears aggressive. This decision created material additional book value as well as statutory capital, despite the highly uncertain outcome, with the amount discounted at just ~1.7% rate.
ALM business still materially underfunded, generating negative spread. The market value of the unencumbered assets at MBI’s ALM business totaled $1B, while unsecured liabilities totaled $3.8B. The company expects a near full recovery of principal value in its investments to solve this issue, despite 37% of total assets on a cost basis consists of ABS, RMBS and CDO collateral.
We believe MBI will take significant future impairments on its synthetic CMBS portfolio. The synthetic CMBS CDO portfolio totaled $35.1B in par outstanding in 2Q. This portfolio is primarily '06/'07 vintage reference credits with a significant portion originally rated BBB. Due to a lack of disclosure, it is difficult to estimate total loss with accuracy, but we believe it will be several billion dollars ultimately.
Given run-off state and substantial level of negative book equity, we see little value for the equity. We are thus downgrading shares to Underweight.
Action: Tangible book value at ($40.22) per share? That's right, negative and by a mile, according to JP Morgan. Difficult to say with such a wild stock, but I would expect this call to hurt the stock real bad. If we weren't in official "squeeze the heck out of shorts"-mode, I'd say 10+% today.. But with a stock suspect to have a squeeze any second of day, I'd rather be cautious.
I'd say anything in 5% range of yesterday's close is still a short.. with covering area just above the 10% mark.
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