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MBIA May Return to Municipal Bond Market After 2008 Crisis

Updated from Tuesday to correct timing of MBIA commutations and spelling of NPFG

NEW YORK (TheStreet) - A Standard & Poor's upgrade of the credit rating of MBIA's (MBI - Get Report) municipal bond insurance unit may allow the company to write new business five years after the financial crisis put the firm on the verge of collapse.

On Tuesday S&P upgraded National Public Finance Guarantee, MBIA's municipal bond insurance division, to a rating of 'AA-' from 'A,' putting the unit in a position to write new insurance policies for issuers in the municipal bond market, according to BTIG analyst Mark Palmer. That upgrade and the prospect of a return of MBIA to the municipal bond insurance market would mark a significant step in the company's recovery from the financial crisis and could lead to new revenue streams.

"MBI is poised to join buy-rated Assured Guaranty ((AGO - Get Report)) and Build America Mutual ((BAM)) as the only active bond insurers... The news of the upgrade should come as a relief to some investors who had been concerned that the absence of an announcement to this point did not bode well for MBI's chances of a positive outcome from S&P," Palmer wrote in a note to clients.

S&P's upgrade of National Public Finance Guarantee may be a tailwind for MBIA and its stockholders. However, the municipal bond insurance market is far where it was when the company last was a player. The penetration rate of bond insurance is currently hovering at about 5% of overall issuance, a "stark contrast" to the 57% rate seen when the market was humming in 2005, according to Palmer.

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Low interest rates have tempered demand for municipal bond insurance, even as the field of providers has narrowed to Assured Guaranty (AGO - Get Report) and Build America Mutual (BAM).

Palmer said in his report that a meeting with MBIA management and National Public Finance Guaranty CEO Bill Fallon indicated a ramp up of the business could take time.

"Fallon said that while National would be prepared to write new business on the same day it received a credit-rating upgrade to 'AA,' he also understood that some municipalities were likely to try to exploit the unit's desire to demonstrate its viability as it re-launches after a five-year hiatus," Palmer wrote.

$6 Billion Commutation

Two weeks ago, MBIA announced $6 billion in commutations at its structured products unit, further minimizing some legacy exposures that have weighed on the company since its near-collapse in 2008.

MBIA shares rose over 3% in Tuesday trading to $14.64, closing within reach of a 12-month high. Shares have gained 22% over the past 12-months.

-- Written by Antoine Gara in New York

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