Published December 12, 2012
A long-running legal dispute between Bank of America Corp and insurer MBIA Inc could be settled in early 2013 after recent maneuvers involving MBIA's bonds, analysts at research firm CreditSights wrote.
MBIA last month won the necessary consent of bondholders to change the terms of some of its debt, despite a move by Bank of America to thwart the change. That outcome has reduced the bank's negotiating leverage, increasing the likelihood of a settlement, the analysts wrote in a report dated Tuesday.
Bank of America, the second largest U.S. bank by assets, last week also said that it was proceeding with an offer to buy some of MBIA's bonds, which could be part of a settlement strategy, according to the report. The bank took a similar approach in a pact this year with insurer Syncora Holdings Ltd , CreditSights said.
"We speculate that BofA is adding exposure to MBIA's capital structure to conceal the amount of a settlement so as to not set a precedent for negotiations with other litigants," analysts Rob Haines and Eric Axon wrote.
MBIA declined to comment. A Bank of America spokesman could not immediately be reached.
The legal wrangling is a major cloud hanging over both companies, which have struggled to recover from mortgage-related troubles from the financial crisis.
MBIA claims that Bank of America owes it billions of dollars over soured mortgages that it wants the bank to buy back. Bank of America says the insurer owes it billions over certain credit default swap transactions.
CreditSights said it expects a comprehensive settlement that would cover both issues.
MBIA proposed the changes to its debt on November 7 to eliminate the risk that it might be considered in default if a troubled insurance unit were put into rehabilitation or liquidation by the New York State Department of Financial Services.
MBIA said at the time that if there were such a default, it would have insufficient liquidity to make good on the notes and would probably immediately pursue other actions, including bankruptcy.
Bank of America countered with an offer to buy MBIA bonds, saying it believed the changes would increase the risk of MBIA's insurance unit being placed in rehabilitation or liquidation. That would jeopardize all policyholder claims, including Bank of America's, the bank said. But on November 26, MBIA said it won the necessary consent of bondholders to make the changes.
On December 5, Bank of America said it waived certain conditions in order to continue with its offer to buy MBIA bonds through Tuesday. It has not said whether it has extended the offer.
CreditSights said MBIA could avoid regulatory seizure for three to four years or potentially altogether if a settlement with Bank of America occurs.
(Reporting By Rick Rothacker in Charlotte, N.C.; Editing by Nick Zieminski)