Goldman Sachs
(NYSE: GS) released an interesting research note on various bond
insurers that have seen a spectacular run-up over the last few days.
Bond insurance companies make money by providing lenders with insurance
that borrowers will make timely payments in exchange for a fee from the
borrower. Unfortunately, this great wave of defaults has cost these
insurers billions as they are forced to pay out more claims at higher
amounts. Recently, some of these companies have come out saying that
Wall Street has blown their problems out of proportion. So, how much
are they really worth?
Goldman Sachs valued the three largest bond insurance companies
under three scenarios. The first scenario (“Run-Off”) is a situation
where the insurers won’t raise enough capital to satisfy ratings
agencies and may struggle to write new business. The second scenario
(“Ongoing Concern”) assumes a capital raise in line with losses with no
added book value and a derivative mark-down. And the third scenario
(“Bailout”) is a best-case scenario where the firms are bailed out with
capital injections sufficient to operate in their current condition.
So, where do these companies stand?
Currently, it looks like ABK is trading at Run-Off valuation; MBI is
trading at Ongoing Concern valuation; and, SCA is trading at Ongoing
Concern valuation. Are these accurate numbers? What are the odds of
these companies receiving a bailout? Well, the numbers are somewhat
subjective, but a bailout should not be thrown out of the cards – just
look at Countrywide. In the end, these companies still face substantial
problems, it’s simply a matter of the methods they are able to use to
get out of them that determine their valuation!
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