MBIA Inc (MBI)

[Enterprising Investor]

Hot Research PM: MBIA Could See Happy Ending in Puerto Rico (11/03/15)

MKM Partners upgrades the bond insurer, expecting a big jump in the share price.

MBIA (MBI: NYSE)
By MKM Partners ($7.74; Nov. 3, 2015)

We are upgrading MBIA to Buy from Neutral as we believe the bond insurers and the Puerto Rico Electric Power Authority (PREPA) will soon come to a consensual agreement whereby losses to MBIA (ticker: MBI ) (and the other bond insurers) will be minimal, if any.

PREPA:

• Several press reports suggest that the bond insurers and PREPA are close to a consensual agreement.

• Time is running out for all parties unless an agreement is reached soon. No agreement is a worst outcome for all.

• The bond insurers are likely to be a key part of the solution by providing PREPA with a surety bond guarantee to serve as a reserve fund.

Puerto Rico:

• Following a PREPA deal, there will still be a lot of work to do to “fix” Puerto Rico and the Goverment Development Bank for Puerto Rico.

• We expect the PREPA deal will serve as a restructuring framework for many of the island’s additional credits.

• The financial guarantors are extremely important to a successful Puerto Rico outcome as they can help the commonwealth access the capital markets at a reasonable cost.

Volatility:

• Our upgrade does not mean we expect an end to the volatility in MBIA’s shares.

• Capital structure traders could continue to be behind any extreme price swings in the stock as they rebalance their positions.

• One upcoming event where we could see a spike in volatility is when Zohar 1 matures on Nov. 20 even though this event has no bearing on MBIA or National Public Finance.

We believe the outcome in Puerto Rico looks more favorable for the financial guarantors and, therefore, we now recommend investors buy shares of MBIA. Our $12 price target is based on a multiple of 0.4 times our 2016 adjusted book value per share estimate.

-- Harry Fong
-- Darren Marcus

http://www.barrons.com/articles/mbia-could-see-happy-ending-in-puerto-rico-1446577852