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Analyst: MBIA CEO change, buyback plan could be precursors to sale

MBIA Inc.'s CEO succession plan is a good fit for the circumstances, one analyst said.

CEO Joseph Brown four years ago gave himself a four-year timetable to retire from the company, so the company's Aug. 10 announcement that he would cede the post to COO William Fallon should have come as no surprise, BTIG analyst Mark Palmer said in a research note to clients.

Brown is credited with turning the company around from the struggles of the Great Recession after resuming his leadership position in 2008. However, MBIA eventually found itself ensnared in the Puerto Rico public debt crisis as an insurer of bonds for the foundering Puerto Rico Electric Power Authority, or PREPA.

A June credit downgrade from S&P Global Ratings led the company to stop its bond insurance business, National Public Finance Guarantee Corp., from writing any new business. The CEO change, rather than capping a comeback, would be a good move for executing a runoff or overseeing a sale, Palmer suggested.

"We believe Fallon is the natural choice to oversee the unwinding of National's insured portfolio, given his former role as the unit's chief executive," Palmer wrote. Fallon, who is CEO for National Public Finance, was chosen as a CEO successor for MBIA two years ago, the company noted.

The CEO of Assured Guaranty Ltd., one of the two dominant bond insurers in the market, is actively looking to consolidate the bond guaranty industry, and Palmer believes the company is a natural acquirer for MBIA.

The CEO announcement was the second of MBIA's major leadership changes since July. Following the downgrade, MBIA on July 31 announced the resignation of three board members following a review of what the company called an "appropriate governance profile." The company added that there was no plan to replace them. Brown said subsequently on a conference call that MBIA needed no major actions to stay afloat and would be taking measures to determine the company's full intrinsic value that it could deliver to shareholders over the next three to five years.

"The big variables in that are investment income, expenses, the level of share buybacks and interest rates," Brown said during the conference call, according to a transcript of his remarks.

Share repurchases could be an appropriate precursor to a sale, Palmer said.

"We believe that S&P's downgrade of National made it much more likely that [MBIA] would first look to use its ample excess capital to buy back as many shares as possible before looking to sell itself as a means of maximizing shareholder value," Palmer wrote.

Brown remarked during the conference call that the manner in which Puerto Rico's debt is resolved will be part of its value assessment.

During Assured Guaranty's second-quarter earnings conference call, the company's deputy chairman, president and CEO, Dominic Frederico, touted his company's ability to absorb even the most severe losses from Puerto Rico's public debt without a ratings downgrade. Asked about obstacles to acquiring competitors who are in runoff, Frederico listed capital structure, the match of a target's portfolio with Assured's risk profile and companies' determination to survive independently. Bringing competitors under its umbrella would be positive for the space, he said.

"We [would] get to upgrade those bondholders to the Assured Guaranty rating, which is a huge benefit," he said, according to a transcript. If Assured Guaranty can work around the equity structure and risk profile, it will work around the other acquisition issues, he said.

S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.