NEW YORK ( TheStreet) -A legal battle between Bank of America (BAC - Get Report) and MBIA (MBI - Get Report) has negative implications for creditors of both companies, according to a report published Monday by Moody's Investors Service.
MBIA wants to tear up some $6 billion in insurance it wrote for Bank of America, arguing it was based on misrepresentations made by the bank's Countrywide Financial mortgage unit in the runup to the 2008 subprime crisis. Bank of America has countered by challenging MBIA's efforts to legally separate its MBIA Insurance Corp. unit, which wrote the subprime mortgage guarantees, from its healthier municipal insurance business, called National Public Finance Guarantee Corporation.
In the latest salvoes between the two companies, MBIA has attempted to amend the terms of certain of its bonds to prevent a potential default by MBIA Insurance from causing a cross-default by the parent company, requiring it to accelerate all its bond payments. Bank of America is attempting to block this maneuver, by offering to buy up the relevant MBIA bonds for $330 million, versus their previous market value of $200 million, according to Moody's.
The Bank of America offer is negative for Bank of America bondholders because it exposes the bank to additional credit risk from MBIA, according to Moody's. On the other hand, Moody's observes that Bank of America creditors would ultimately benefit from Bank of America's strategy if it forces MBIA into accepting a smaller settlement from Bank of America over the subprime mortgage insurance dispute.MBIA creditors, meanwhile, would be negatively impacted if Bank of America succeeds in blocking the company's move to isolate credit risk at MBIA Insurance. That's because MBIA's parent company, and its healthier municipal bond insurance unit would be exposed to a default by MBIA Insurance. Further, it might lead to a smaller settlement, which would hurt capital and liquidity at MBIA Insurance, according to Moody's. Despite the Moody's report, shares of both Bank of America, which got an upgrade from Stifel Nicolaus and MBIA were higher in early trading on Monday. -- Written by Dan Freed in New York. Follow @dan_freed