MBIA Inc (MBI)

[Enterprising Investor]

MBIA’s Special Dividend Will Have to Wait (3/03/17)

The company might make a request after the Puerto Rico Electric Power Authority restructuring is completed.

MBIA (MBI: NYSE)
By MKM Partners ($10.12, March 2, 2017)

The key item that investors are focused on for MBIA is when the company will make a request to the New York regulator for a special dividend.

We believe MBIA’s (ticker: MBI) National Public Finance unit has ample excess capital under the Standard & Poor’s AAA capital model that may reach $2 billion with 2016 numbers up from about $1.5 billion in 2015. MBIA management has indicated that it will likely go for a special dividend once it believes the outlook for Puerto Rico is more certain. To us, that means after the Puerto Rico Electric Power Authority (PREPA) restructuring is completed. There remain three consumer-activist groups challenging the new electric rates that we believe will be dispensed by the court in due course. There were originally seven groups challenging the rates, four have gone away

We maintain our Buy recommendation on MBIA with a price target of $15, based on a multiple of 0.5 times our 2018 adjusted book value estimate of about $32.

In our view, the company’s fourth-quarter operating results were essentially in line. The sale of the U.K. unit, while not an economic event for the company, is nonetheless important as it removes the last major potential liquidity issue for the legacy unit. MBIA still has some work to do to put its legacy unit into auto drive, but liquidity is no longer a significant risk.

National Public Finance reported a loss ratio of 45% for the quarter against our estimate of 20%. The $28 million of losses incurred this quarter were all due to a higher risk-free interest rate used for discounting loss and recovery estimates. The company did not post any additional reserves for Puerto Rico this quarter as it likely concluded that the events in Puerto Rico during the quarter did not warrant any changes in their probability analysis of potential losses and recoveries.

Looking forward, we have reduced our 2017 earnings-per-share estimate to five cents from 35 cents. We are also initiating a 2018 EPS estimate of nil. The key reason for cutting our 2017 estimate is a higher loss ratio as a higher risk free rate will likely affect the discounting of reserves more so in 2017 than 2016. Our 2018 estimate reflects a sharp decline in earnings from refunding. This item is impossible to estimate, but we know that new muni issuance dropped to zero in 2008 so the 10-year call date on bonds will not lead to refundings. There will be some, but nothing like we have seen over the past several years and possibly again in 2017.

-- Harry Fong

http://www.barrons.com/articles/mbias-special-dividend-will-have-to-wait-1488545583