A quiet announcement from insurer MBIA (MBI) about changing the terms on existing debt agreements with certain senior note holders could be a shot across the bow against Bank of America (BAC) in MBIA’s ongoing dispute with the banking giant over putbacks on mortgage bonds insured by MBIA.

Armonk, New York-based MBIA announced quietly this week that it would like senior-note holders of debt issued years ago to consider the possibility of naming National Public Finance Guarantee as the “restricted subsidiary” in those deals, thereby replacing MBIA Insurance Corp., which currently holds that role.

Why would they want to do this?

A restricted subsidiary is a business unit that is inextricably tied to its parent company, making the parent company at risk when any financial issues surface at the subsidiary.

By asking senior-note holders to name the National Public Finance subsidiary as the “restricted sub,” analysts believe MBIA is essentially telling Bank of America that it has options outside facing a liquidity freeze or a major restructuring if the bank continues to delay payments to MBIA Insurance Corp. related to the firms’ ongoing dispute about MBIA-insured mortgage securities.

Manal Mehta, an analyst with Sunesis Capital, said “Bank of America wants to win its battle against MBIA by delaying payments on Countrywide putbacks. Their hope is that delaying payments will lead to a liquidity shortfall at MBIA Insurance Corp. and regulatory intervention at that entity would trigger an event of default at the holding company forcing MBIA to seek bankruptcy. By seeking this consent solicitation, MBIA effectively thwarts Bank of America’s nefarious strategy of litigating by delay.”

With National Public Finance becoming the restricted subsidiary, the key parties become more protected, Mehta said. So, if MBIA Insurance continues to lose liquidity, it would neither effect the holding company nor the National Public Finance Guarantee unit if the debt holders approve the proposed changes in Mehta’s opinion.

Bank of America declined comment.

The two parties have been fighting it out for awhile. MBIA also faced litigation from banks that questioned the insurer’s 2009 restructuring, which led to the creation of the National Public Finance Guarantee Corp. While banks have alleged that MBIA’s 2009 restructuring was a move to shield itself from mortgage bond claims after the financial crisis, many of the suits filed by banks against MBIA over the restructuring have since been dropped.

Mehta says the only real risk MBIA has left is related to mortgage bonds that it insures for Bank of America. He believes BofA is delaying payments on the policies to try to force the company closer to a liquidity crisis and, in turn, a settlement that is more favorable to BAC.

The plan to change the debt agreements in Mehta’s opinion is MBIA trying to tell BAC that it cannot force MBIA into crisis mode or an unfavorable settlement.


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