MBIA Gets $1 Billion Capital Infusion; Warns on Q4 Earnings

The parent of MBIA Insurance Corporation said Monday that it has entered into an agreement with private equity firm Warburg Pincus that will provide the insurer with up to $1 billion to fund ongoing operations.

Under the agreement, Warburg Pincus will make an initial investment of $500 million in MBIA common stock at $31.00 per share; the private equity firm will then backstop a shareholder rights offering of up to $500 million that MBIA said it expects to undertake during the first quarter of 2008.

The investment comes as the insurer said it expects mortgage-driven credit losses to accelerate in the fourth quarter, expecting loss reserves of $500 to $800 million in the fourth quarter related to prime home equity lines of credit and closed-end second mortgage-backed securities. MBIA also said it expects losses “significantly greater than that of the third quarter” in its exposure to CMBS and CDO issuances — HW readers should note that the fact that MBIA calling attention to a substantial widening in commercial mortgage-backed security spreads is significant and new.

Last week, Moody’s Investors Service had said MBIA was “at greater risk of exhibiting a capital shortfall than previously communicated,” a move that had sent shares at the insurer tumbling. All three primary rating agencies have said they are currently reviewing the capital position and rating of various financial guarantors.

In response to today’s announcement, Fitch Ratings said it “will consider both the positive impact of the capital addition, as well as the negative implications of the noted losses” in its analysis, which it said would be complete within the next week.

Something tells me that an extra $1 billion will go a long way towards tempering any negative opinions the rating agencies may have had previously.