MBIA, Inc. (NYSE:MBI)

There is something very seriously wrong with this company. I cannot completely put my finger on it, but the more I read, the more I feel like I am looking squarely at a company going bankrupt. Here are the two sections that raised eyebrows.

“Further, the remaining insured portfolio, aside from these exposures, could deteriorate and result in additional significant loss reserves and claim payments. MBIA Corp.'s ability to meet its obligations is limited by available liquidity and its ability to secure liquidity through financing and other transactions. In this circumstance there can be no assurance that MBIA Corp. will be successful in generating sufficient cash to meet its obligations. In particular, as of March 31, 2016, MBIA Corp. insures $776 million of gross par outstanding of notes issued by Zohar II 2005-1 Limited, a high yield corporate collateralized debt obligation ("CDO"), which matures in January of 2017. If cash flows generated by Zohar II are insufficient to pay the insured amount at maturity in full, MBIA Corp. will be called upon to satisfy any unpaid amount. If Zohar II fails to generate cash to cover a substantial amount of the insured exposure at maturity, or if MBIA Corp. is unable to reach a restructuring agreement or to raise sufficient liquidity, MBIA Corp. may ultimately have insufficient liquid resources to continue to pay claims. Any such failure to meet its obligations could cause the New York State Department of Financial Services ("NYSDFS") to put MBIA Insurance Corporation, exclusive of MBIA UK and MBIA Mexico, into a rehabilitation or liquidation proceeding and/or to order MBIA Insurance Corporation to cease paying any claims under its policies. Given the separation of MBIA Inc. and MBIA Corp. as distinct legal entities, the absence of any material intercompany lending agreements or cross defaults between the entities, and the lack of reliance by MBIA Inc. on MBIA Corp. for the receipt of dividends, the Company does not believe that a rehabilitation or liquidation proceeding with respect to MBIA Insurance Corporation would have any significant long-term liquidity impact on MBIA Inc. or result in a liquidation or similar proceeding of MBIA UK or MBIA Mexico. Such a proceeding could have material adverse consequences for MBIA Insurance Corporation, including the termination of insured credit default swap ("CDS") contracts for which counterparties may assert market-based claims, the acceleration of debt obligations issued by affiliates and insured by MBIA Insurance Corporation, the loss of control of MBIA Insurance Corporation to a rehabilitator or liquidator, and unplanned costs.”

And further….

“As of March 31, 2016 and December 31, 2015, the liquidity position of MBIA Inc. was $371 million and $416 million, respectively. The term "liquidity position" refers to cash and liquid assets available for general liquidity purposes. During the three months ended March 31, 2016, $105 million was released to MBIA Inc. under the MBIA group's tax sharing agreement (the "Tax Escrow Account"). Based on the Company's projections of National's dividends, payments into the Tax Escrow Account, and other cash inflows, the Company expects that MBIA Inc. will have sufficient cash to satisfy its debt service and general corporate needs. However, MBIA Inc. continues to have liquidity risk which could be triggered by deterioration in the performance of invested assets, interruption of or reduction in dividends or tax payments received from operating subsidiaries, impaired access to the capital markets, as well as other factors which cannot be anticipated at this time. Furthermore, failure by MBIA Inc. to settle liabilities that are also insured by MBIA Corp. could result in claims on MBIA Corp.”

The thing I keep wondering… why cite a very specific transaction, such as Zohar II? I might be wrong, but the only time I have ever heard of someone putting something like this at the top of their 10-Q is they were afraid of default. It looks like the part of the Zohar (the 2005-1 transaction) notes were transferred to Assured Guaranty in a recent transaction but the company still retains part the risk. The very scary part is that the company actually had to PAY an additional $23 MILLION in cash and give up its UK operations to get rid of this albatross. That seems like a terrible transaction for MBIA and it should speak volumes about the condition of the company to shareholders.

The company also has around $600MM in liquidity. While that might seem like a ton to many companies, for a company such as this with bets in the CDO and RMBS markets, this is a drop in the proverbial bucket. One bad event, and they are done. I cannot imagine that their strategic transaction with Assured Guaranty will be the last. I am seeing signs of capital constraints all over the place here. A good sign that there are some serious problems will be when you start reading about the New York DFS stepping in to investigate. If you own shares, THAT is the event you should be most afraid of. My guess is the bad news starts coming out late this year and ends in some sort of event towards the middle of next year. Buyer BEWARE.