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MBIA Still Carries Complexity Discount

David Paul Morris | Bloomberg | Getty Images

MBIA scored a convincing victory Monday in its latest skirmish with Bank of America, so the somewhat muted response in the shares since then is surprising.

MBIA shares hit a 52-week low of $6.78 on Nov. 13 after Bank of America made a tender offer for some of its bonds, hoping to block MBIA from changing the terms of certain bond issues to protect its municipal bond insurance unit in the event of a default by its securitization business.

MBIA successfully fought off Bank of America's tender offer, sparking a rally in its shares. MBIA shares hit $9.18 on Monday, but then gave back some of those gains and closed at $8.56 on Tuesday.

Many investors may still see MBIA as facing a bankruptcy threat without realizing that it is only MBIA Insurance — the securitization subsidiary — that risks insolvency at this point. That was what MBIA accomplished Monday when it convinced a sufficient number of bondholders to agree to amend the terms of their obligations to prevent a default by MBIA Insurance from triggering a "cross default" by the parent company at the same time.

"Now, a default or liquidity event at MBIA Insurance Corp will have no ramifications for the obligations of the holding company," wrote MKM Partners analyst Harry Fong in a note published Tuesday.

Fong has price target of $18 for MBIA — a gain of more than 100 percent versus Tuesday's close. That assumes a 50 percent discount to Fong's estimated 2013 adjusted book value (ABV) for National — MBIA's municipal bond insurance unit of $25.94, and 30 percent of the $12.99 trailing ABV of MBIA Insurance. Even if MBIA Insurance is forced into bankruptcy, 50 percent of National's ABV alone would be worth $13.

Still, most analysts believe MBIA Insurance will survive and win a $3 billion settlement from Bank of America — greater than the entire $2.6 billion in shareholders equity at MBIA's parent company as of Sept. 30.

There are still a couple of lawsuits that need to be resolved before MBIA's municipal bond insurance business is completely in the clear, but it is hard to see at this point how it comes apart.

Bank of America could settle with MBIA any day, or it could drag the case on for another couple of years. In the meantime, look for an upgrade for MBIA's parent company from Moody's Investor Service in the near term. The bond rating agency downgraded MBIA Nov. 19, citing the cross-default threat, but said it would consider reversing the downgrade if MBIA could amend its bonds to delink the parent and MBIA Insurance. That's what MBIA accomplished on Monday. A Moody's upgrade would merely be an acknowledgement of that fact. Still, assuming the upgrade comes, it will likely spark another rally in MBIA shares — a reflection of how poorly the market understands the issues surrounding MBIA.

That lack of understanding suggests an opportunity for investors, and one that may be particularly attractive since it has relatively little to do with what happens with the economy.

—By TheStreet.com's Dan Freed

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