MBIA Inc (MBI) 2015 Q3 法說會逐字稿

Welcome to the MBIA Inc. third quarter 2015 financial results conference call. I would like to turn the call over to Greg Diamond, Managing Director of Investor and Media Relations at MBIA. Please go ahead.

Thank you, Crystal. Welcome to MBIA's conference call for our third quarter 2015 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results press release, our 10-Q, our quarterly operating supplements, and our statutory financial statements for both MBIA Insurance Corporation and National Public Finance Guarantee Corporation.

We also posted updates to the listings of our insured portfolios. Please note that anything said on today's call is qualified by the information provided in the Company's 10-Q, 10-K, and other SEC filings as our Company's definitive disclosures are incorporated in those documents.

We urge investors to read our 2014 10-K and third quarter 2015 10-Q, as they contain our most current disclosures about the Company and its financial and operating results. The 10-K and 10-Q also contain information that may not be addressed on today's call.

Regarding the non-GAAP terms included in our remarks today, the definitions and reconciliations of those terms may be found in our most recent 10-K, 10-Q, our financial results press releases, and our quarterly operating supplement. The recorded replay of today's call will become available approximately one hour after the end of the call and the information for accessing it is included in yesterday's financial results press release.

And now here's our Safe Harbor disclosure statement. Remarks on today's conference call may contain forward-looking statements. Important factors such as general market conditions and the competitive environment could cause our actual results to be materially different than the projected results referenced in our forward-looking statements.

Risk factors are detailed in our 10-K, which is available on our website at MBIA.com. The Company cautions not to place undue reliance on any such forward-looking statements. The Company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is no longer accurate.

For our call today, Jay Brown, Bill Fallon, and Chuck Chaplin will provide some brief introductory comments. Then Anthony McKiernan will join Jay, Bill, and Chuck for the question-and-answer session that will follow. Now here's Jay.

Thanks, Greg, and good morning. We had a very solid quarter, with operating income of $24 million and an increase in adjusted book value per share to $29.55. While the comparison to last year's third quarter operating income is poor, due to unusual items in that quarter, we do have a positive sequential trend.

In last year's third quarter, we had a large reserve release related to taxes and a substantial E&O insurance recovery, resulting in an above average 2014 operating income. In addition to adequate earnings, we continue to invest in the future growth of our business in the quarter, increasing our capacity in National to identify, underwrite, and win new business.

We still have a significant way to go there, but the early results remain encouraging. Finding transactions that meet our return requirements and that are consistent with our underwriting standards and portfolio guidelines remains challenging, but we continue to believe that the current municipal stress, combined with eventual higher interest rates, will generate penetration for the bond insurance industry sufficient to drive increases in our adjusted book value and shareholder value.

We and our advisers have continued to work with our Puerto Rico credits, Particularly PREPA, the Puerto Rico Electric & Utility and Bill will give you an update later on our efforts. The process has been frustrating at times and we may have a long way to go before achieving full resolution across all of Puerto Rican credits. In the meantime, the ebb and flow of news reports and analyst prognostications continues to weigh down on our stock price.

The low stock price has enabled us to continue to add significant long-term value for shareholders via share buybacks. We have now repurchased shares in each of the last six quarters. In the third quarter, we repurchased 19 million shares for $120 million and we completed the buyback program that had been authorized by the Board of Directors at the end of July.

To date in 2015, we have repurchased 39 million shares for $297 million. And as of October 28, we have been authorized to undertake an additional 100 million of share repurchases. Chuck will take you through our thinking about the amount and the limitations on our buyback activity, but we will stand ready to use available excess liquidity for buybacks to take advantage of extraordinarily low prices.

During the quarter, Warburg Pincus sold all of its remaining shares to the market, so our shares are now somewhat more broadly held than they had been previously. As a result of the Warburg sale, Sean Carney stepped down from our Board.

The Board also recently elected two new directors. Keith Curry joined us in July. He was a city council member in Newport Beach, California, and he also served as the city's mayor. He retired as a founder and managing director of Public Financial Management Inc. known as PFM, the nation's largest public advisory firm.

And earlier this week, we announced that our Board elected Lois Scott, formally the Chief Financial Officer of the City of Chicago to be a director. Both of these new directors spent their careers in public finance and their election to our Board reaffirms our focus on the US municipal market and our commitment to long-term leadership in our industry. Now I'll turn it over to Bill.

Thanks, Jay. I will update you on Puerto Rico, our insured portfolio runoff and National's new business activities. First, Puerto Rico. As most of you know, our biggest exposure in Puerto Rico is to PREPA, when we continue to strongly believe that the authority has all the tools it needs to address its operation and liquidity needs, including debt service.

In the third quarter, we closed our bond purchase with PREPA, giving them some liquidity breathing room. We continue to have discussions with PREPA and its advisers. However, no agreement has been reached at this time. As we stated last quarter, we believe PREPA can be fixed. As an example, PREPA currently charges approximately $0.19 per kilowatt hour, which is less than several states and substantially lower than most island economies.

Since PREPA has not increased its base rate in over 25 years and has an obligation to charge rates that cover debt service, we filed a petition with the Puerto Rico Energy Commission, requesting that they increase electricity rates on a temporary basis to ensure that PREPA can pay operating expenses and debt service and that they impose fixed deadline on PREPA's pending rate petition, as required by Puerto Rico law and the bond documents.

We do not believe that the regulators' rejection of our petition requesting a temporary $0.042 rate increase was well founded. We filed an appeal with the Puerto Rico Court of Appeals. Meanwhile, it's been reported in the press that PREPA's Board has recently signaled a willingness to consider increasing rates as one element in a reorganization and that the governor has authorized such an increase in connection with the restructuring of PREPA's debt.

PREPA has also entered into a tentative agreement in principle with some of its uninsured creditors to exchange their bonds. Puerto Rico recently started discussions with creditors on other credits and we hope to have more information in the next month. We insured $273 million in Commonwealth Guaranteed GDB debt service that matures on December 1, which benefits from protection under the Puerto Rico constitution.

We expect the government to pay, but if it defaults on its guarantee, National stands ready to make the payment under our policy. To the extent that National pays any claims, it will aggressively -- it will be aggressive in seeking recovery of those payments. We also have exposure to COFINA, where we believe that dedicated tax revenues backing those bonds are legally well protected.

And we think that legislation passed earlier this year will have a favorable impact on the highway debt we insure. There have been hearings in the Senate Finance and Energy and National Resources Committees on Puerto Rico over the past six weeks. In which the Commonwealth Government has reiterated its position that debt restructuring will be necessary and has called on the US Congress to approve access to the bankruptcy courts.

The Obama Administration also laid out a game plan calling for bankruptcy access for Puerto Rico and its instrumentalities, but is leaving implementation to the Congress. There does not appear to be support in Congress to move this forward. We do not support a retroactive change in the law that would allow the Commonwealth and its instrumentalities to have broader powers to impair obligations owed to long-term investors, many of whom are individuals, retirees, and other main street investors in Puerto Rico and throughout the United States.

Hedge funds, which got a lot of attention at the Senate hearings and media coverage, actually own a minority of the Puerto Rico debt outstanding. The hearings may ultimately add value by focusing attention on Puerto Rico's problems. But so far, it is unclear of anything tangible and timely will come from the federal government.

The insured portfolio continues to amortize at a rapid pace, with $17 billion that either matured or refinanced in the third quarter, bringing the portfolio to $177 billion gross par outstanding. Year to date, $45 billion, or 20% of the portfolio, has run off. We expect the insured portfolio continue to amortize and free up excess capital.

We estimate we have over $1 billion of excess capital to the S&P AAA capital requirement, which we will be seeking to deploy more aggressively when we have additional clarity around the path forward on Puerto Rico. This would include seeking approval for a special dividend to the holding company.

On the new business front, we continue to review price and close more transactions each quarter. We insured 16 policies in the third quarter and we are increasingly being used by the financial advisers and bankers who will generate the lion's share of new business opportunities.

In total, we wrapped $129 million of par. Notably, we wrapped eight deals in the secondary market this quarter, which are the first secondary deals we've insured since we re-entered the market. Since the end of the third quarter, we have been mandated on eight more deals, totaling $98 million of par.

With Tom Metzold on board in the quarter, who joined us from Eaton Vance, and he enhances our secondary market capability as well as giving us new insights into trading and the value being added by our insurance. Now Chuck will give you an update on our financial results and balance sheet.

Great. Thanks, Bill, and good morning, everyone. Operating income was $24 million in the quarter compared to $120 million in the year-ago quarter. As Jay has noted, the comparison of last year is a tough one because of two major unusual items in the Q3 2014 that we didn't expect to repeat.

We had a tax reserve release for $77 million last year and received a settlement from our Errors and Omissions carriers related to expenses incurred in our transformation and other litigations. Aside from these elements, our run rate on income was about $31 million. The decline to $24 million in this year's third quarter is due to lower premium earnings related to amortization of National's insured portfolio.

Operating income per share was $0.15 compared to $0.63 in the third quarter last year. Adjusted book value per share grew significantly in the quarter to $29.55. Robust share repurchase activity in 2015 is the driver of this improvement. So far this year, we've reduced outstanding shares by 20%.

Now I'll take a couple minutes to talk about performance at the segment level. National's operating income was $48 million compared to $70 million in last year's third quarter. The variance to last year is primarily driven by the E&O recovery and the decline in premiums earned due to a smaller insured portfolio.

Our loss and loss adjustment expense was a benefit of $7 million in this year's third quarter compared to a benefit of $8 million in the Q3 last year. This year's benefit was driven by a lower risk-free rate and its impact on the value of recoveries in our loss models. There was very little movement in terms of our expectations about fundamental credit performance.

Written premium in the quarter was $1 million on $129 million of par insured. The favorable trend in terms of market acceptance continued. We did more transactions in the Q3 than in any quarter since we recommenced writing new business in National last year and we believe the momentum has continued into the Q4 so far.

National's statutory capital was $3.4 billion at September 30 compared to $3.3 billion at year end 2014. It had invested assets of nearly $4.8 billion at September 30. After the quarter ended, National paid a dividend to MBIA Inc. of $114 million.

Now with statutory capital growth and a reduction in gross par insured to about $177 billion, we believe that National has over $1 billion of excess capital relative to the S&P AAA standard even after its dividend. As Bill has mentioned, we expect that this capital will provide substantial opportunities for us in the future.

In the corporate segment, we had an operating loss of $24 million compared to income of $50 million in the third quarter last year. The variance to last year is almost entirely driven by the tax reserve release, partially offset by lower operating expenses. In the quarters of 2015, the operating expenses and debt service in the corporate segment have been pretty level at about $44 million a quarter.

The segment started the quarter with $497 million of liquidity and finished with $306 million, primarily because we used approximately $120 million to buy back shares in the quarter. Our Board of Directors has now given us an additional share repurchase authorization of $100 million.

We expect that inflows at the holding company level including tax escrow releases and dividends will enable us to remain above our liquidity minimum target and to reach our target of achieving middle investment grade debt leverage by the end of 2018, including the impact of the new authorization. But, we do not see any path to buy backs beyond this authorization until we're in a position to receive extraordinary dividends.

Our liquidity and leverage objectives will continue to define the limits of our repurchase activity. Just to be clear, we expect to use this $100 million authorization if prices remain low. But we do not expect to have adequate resources to go beyond this until and unless our liquidity outlook changes materially, including by receiving extraordinary dividends.

Now turning to MBIA Corp. We had a statutory loss in the third quarter of $12 million compared to income of $47 million in last year's third quarter. Last year's third quarter benefited from accelerated premium recognition on terminated policies, a large fee related to another terminated policy, and MBIA Corp.'s share of the recovery from the E&O carriers.

Plus, the insured portfolio has declined by nearly 30% since last year's third quarter, so run rate premiums are lower as well. Loss and loss adjustment expense was $50 million in this year's third quarter. We saw some deterioration in the value of excess spread recoveries from higher than expected voluntary prepayments and an increase in loss on the one CMBS pool in which we had been making payments and then miscellaneous smaller losses on a large number of policies.

Secondly, prepayments are affected by interest rates, home value appreciation and the fact that many of the loans in the securitization are beginning their amortization periods. MBIA Corp.'s statutory capital was $813 million at September 30, 2015 and its liquidity position was $399 million. While the insured portfolio is much more stable than in the past, there continue to be areas of risk.

One of the areas of greatest uncertainty is around our high yield CDO book where we have exposure to the two deals, known as the Zohar funding CDOs. Zohar 1 matures on November 20, 2015, with approximately $149 million of insured par outstanding.

Unless the notes are repaid in accordance with their terms, or if we can agree on a consensual restructuring of all the exposures before that date, we stand ready to fund the payment at maturity and then to vigorously exercise our rights to ensure recovery of that payment and mitigate the risk of loss on the $808 million of bonds issued by Zohar 2, which mature in January 2017. We continue to manage MBIA Corp. with a view toward maximizing the margin of safety for policyholders and creating maximum recovery for our surplus note holders.

We've continued to make progress on expense management as well. Year to date, our consolidated expenses including National, MBIA Corp. and the holding company are 28% below 2014's level. Excluding the direct expenses of our investment management subsidiary, which was sold early in 2015, the reduction is about 4%.

All in all, this has been another quarter of progress toward a more stable operating future for your Company and enhancement of value through share repurchase. At this point, we would be happy to entertain any questions you may have.

(Operator Instructions)

Our first question comes from the line of Brett Gibson with JPMorgan.

Great, thanks. Good morning, gentleman. During your prepared remarks, you mentioned that you expect to pay -- expect Puerto Rico to pay the December maturity. But can you give us a little more detail about the liquidity and the resources that the GDB has in advance of that December 1 maturity? So that's the question number one.

Question number two is related to what were the $50 million of losses that were booked at Corp. during the quarter. Can you outline what those were? And then any additional color on Zohar that you have. And then finally just related to buy backs. So the Company has bought back an enormous amount of stock here to date.

I guess I'm curious how the Company can get comfortable with that given the large deficit of assets to liabilities at the holding company and also the state of Corp.'s specifically, the uncertainties on insured obligations and the non-payment status of the surplus notes. My question is, how can you be comfortable with that and then separately, just the fact that many of the officers at the holding company sit on the Board of Corp. Does that play a factor in your thinking in any way? Thanks.

Brett, it's Bill. With regard to your first question on Puerto Rico, as I stated, we do expect the December 1 payment related to the GDB debt, which is insured or guaranteed by the Commonwealth to be paid. In terms of the liquidity, as you know, it is somewhat difficult because of the information, or lack of information that is being provided. As far as we know, there is liquidity, but again, it becomes almost a week-to-week or month-to-month situation, but at this point, the best we can assess, we believe it will be paid.

We think that as the Commonwealth and GDB get into the beginning of next year, really the first half, is perhaps where there will be real questions in the absence of some type of restructuring other program to address their debt service. Beyond that, there's not a whole lot of information that we have.

And then, Brett, just going on, you asked secondly about MBIA Corp. and its incurred losses in the quarter. We had $50 million of total incurred loss, about half of which is due to the pace of voluntary prepayments that we observed in the second lien RMBS securitizations. So with respect to that book, there are two things that affect our incurred loss, which are defaults and charge-offs of the underlying mortgages and then voluntary prepayments.

Defaults and charge-offs are basically in line with our projections. So not much movement there. However, in the third quarter, compared to our expectations that voluntary prepayments would decline slightly, voluntary prepayments increased. As a result, we think of a combination of continued very low interest rates.

The fact that many of the loans are getting to the point where they stop being interest only and the amortization period begins, so that the homeowners' monthly payment increases significantly. And the fact that there is positive home price appreciation so that each month, there are more homes that are not underwater in the portfolios.

And so that's caused us to take a write-down of the excess spread to the point where the asset on our balance sheet today is about $450 million. So it's about a 5% reduction in the value that we recognize in the third quarter. The other piece is in our CMBS pool portfolio. We have basically only one transaction on which we have incurred loss and on which we are making payments currently.

And the increase in incurred loss in the quarter is really attributable to a single bond that is referenced in that transaction that we had previously expected to perform and which we now expect to be impaired. And that accounts for another roughly $15 million of our incurred loss in the quarter. So, we had $50 million of incurred. $40 million on those two effects that I referred to and about $10 million that is spread over many, many transactions.

I would say across 70 or so other transactions on which we have reserves. It ties in a little bit with your next question, which was about the Zohar matters. There's not a lot I can add relative to our position there, but suffice it to say, given what I just went through, there was no material change in our reserve position in the quarter.

Great. Okay.

And finally, you'd asked about share buy back and how we get comfortable with our balance sheet position in the context of share repurchase, and it's really, there are two measures that we focus on. One is just the liquidity level at the holding company relative to holding company obligations in the future.

So, we're currently sitting with about $300 million as of September 30, in liquidity at the holdco. That's roughly consistent with three years' worth of our operating expenses at the holding company level. We it's setting the minimum level of liquidity, is it -- there is some art as well as science in it. But we think that with this kind of position we're sort of well insulated at the holding company level against any impacts that it may have from unexpected expenses.

Frankly, we think the cash outflows at the holdco level are pretty well set because of our operating expenses and debt service. And we believe that the inflows are pretty well set. They are primarily coming from National's operations, both in terms of dividends, where we've talked about the 2015 dividend as well as expectations for the future as well as releases from the tax escrow.

So we think that from a liquidity position, we're pretty well insulated. The other limitation though is on debt leverage. We've said that we think that our debt leverage is too high, and we ought to be bringing it down over time. We've set a target of getting to middle investment grade credit quality metrics by year-end 2018 with the share buy backs that we've done to date and we're still on track to meet that.

And to the extent that we use the additional share repurchase authorization that we just talked about, that the Board authorized recently, we still think that we will get to our leveraged target by year end 2018. So we're -- we think we're in a pretty good position there and it's frankly, it's driven by the robust cash flow that has been coming into the holding company.

Okay. Thank you for the answers.

Your next question comes from the line of Wayne Cooperman with Cobalt Capital.

You covered most of my questions, but what -- how much, I guess as the portfolio continues to run-off and we're not seeing a lot of opportunities to write new business as quickly as it runs off, doesn't that bring down your ratios pretty quickly and free up more capital for repurchase?

There are two parts to that. So, as we mentioned, Wayne, inside National, you are absolutely right. All the metrics you would look at continue to get stronger and stronger. If you look at anything that looks at the leverage, it's come down substantially. So we've got $3.4 billion of statutory capital.

We have about $177 billion of gross par outstanding at this point in time. That's going to continue to run off. You're going to see numbers below 50-to-1 in terms of par to stat capital very shortly, which if you go back historically, you would never see things like that in a muni only. So that's part of it and you're absolutely right.

That's going to continue to get stronger and stronger. As we mentioned, that builds up excess capital. We tend to compare it what is required under the S&P capital model. The second part of it is then that money getting up to the holding company and Chuck just mentioned that comes about through the -- as of right dividend, the tax payments which then go into tax escrow and as I mentioned, when we get clarity on Puerto Rico, we will be seeking approval for special dividends from National to the holding company which will provide additional financial flexibility at the holding company either buy back stock, repay debt, et cetera.

Okay. I mean, obviously buying back stock at a quarter of book is probably a much higher return than any business that you could write, even if there was business out there.

That is correct.

Your next question comes from Andrew Gadlin with Odeon Capital Group.

Hi, thanks. I think Bill, in your commentary on HTA that there was some legislation earlier this year that strengthened it. Can you talk about that a little bit?

That was the tax legislation that they passed on the oil, which allowed them to increase revenues by about $6 per barrel. And that money has been building up during the course of the year and they have that at their disposal. While there's still some work to be done with regard to how they restructure HTA and there were ideas floated earlier in the year which never got enacted, we do think the credit itself was strengthened through that increased revenue.

The talk has been that, that revenue would go toward the PREPA offering; isn't it?

Correct. That was the idea earlier in the year that was floated and then there's some other details around that. As you know, they never actually moved forward with that. I think other events took priority, in particular, PREPA and now, I think the focus on GDB and Commonwealth debt, but at some point, we would think pretty soon, they will turn their attention also to the highway and perhaps the PREPA financing and some variation of what they had proposed earlier this year.

Got it. And then just switching over to Corp. for a second. In the past, you've been willing to comment on where you think -- what you think of the pricing level of the surplus notes given that they have come down to where they have, low 40%s. How do you look at those today and the ability to do something with the holders there?

It's closer. Not yet at a level that makes sense to us. But it certainly has moved directionally in the last two or three quarters to where it's getting closer to where a transaction might become feasible.

Got it. All right. Thank you very much.

Your next question comes from the line of Brian Charles with RW Pressprich.

Hi, good morning. Just regarding Corp., when thinking about the negotiations with Patriarch Partners and now it's reached the stage where there's litigation involved, it seems less likely a negotiated settlement might materialize before January 2017. In light of that, do you have any thoughts about whether or not a negotiated settlement could be reached before then and absent that, what kind of alternatives might you be exploring to shore up liquidity at Corp., which I think you'll need to focus on if you have to pay out the $800 -- or $800 million of maturity in January of 2017.

Given that there's now litigation in place, we don't really feel comfortable talking about our strategy. Beyond the fact that we expect to make the -- if Patriarch doesn't mark -- make the first payment, which comes up this month, we expect to take any and all actions to improve the position of the Zohar 2 and Zohar 3, which we do not insure. There's a number of steps that we plan on taking which we'll be discussing with Patriarch in the near future.

Just regarding Corp. though, can you discuss any alternatives you're thinking about regarding outside of Patriarch, pursuing liquidity options for Corp. in the case you have to make an $800 million payment in January?

Yes, we have some non-cash assets, which we can monetize. We've got three or four different plans that we're prepared to pursue if that's an appropriate action. Right now, we prefer not to discuss those until they take place.

Would one of those options potentially involve any support from the holding company?

No.

You're not considering that? I'm just wondering because just given the transformation, the holding company has received over $550 million of tax escrow payments from NOLs that were generated at MBIA Corp. And I know to date, you used about $300 million for stock buy back and you're planning on using another $100 million.

I just wonder if because that value has been secured from Corp., are you willing to make any statement that you would be willing to support the stake holders at Corp. if it comes to that, if you need to do that in January of 2017. (multiple speakers)

I think I just made my statement. We do not intend to make any payments from the holding company.

Okay. Thank you.

Our next question comes from the line of Peter Taurasi with Barclays.

Good morning, guys. Just a question on your PREPA exposure, you mentioned the appeal in the prepared remarks, but you disclosed in the 10Q that the MBAA and Assured Guarantee filed a petition to intervene into the Energy Commissions proceeding. Can you expand on what that was?

Yes. PREPA was required -- essentially put together a long-term operating plan and that's what was filed. The regulations then allow parties, interested parties, who think they have something to contribute to intervene, which is what we did. Other parties have intervened. As you cited, we did it in conjunction with Assure there and essentially other trade creditors that have also intervened to be heard.

In fact, I guess there were more than just a few and therefore, they have deferred the date at which they were going to hear from those parties. So, it is a way for us to put forth ideas in terms of how PREPA could be restructured operationally to improve things going forward for their customers. So, that's the process there.

Great, that's helpful. And then you know, at this point given what you know, do you feel like you have enough information to be fully reserved for your PREPA exposure?

We think we have quite a bit of information given the information that we do have. We therefore gone through the process in terms of scenarios and done the appropriate calculations for the reserving.

Okay, thanks. If I could just fit in a couple on Insurance Corp. It looks like Corp. released some contingency reserves in the quarter. Was that primarily related to the maturity of the investment grade corporate pools?

Basically, yes.

Okay, great. And then last thing from me, is there anything that you could say on the litigation that was filed by Patriarch Partners on Monday of this week?

We just received litigation. I guess the only thoughts I would have on it is given the impending maturity and the discussions we had to date, we were disappointed that Patriarch filed the lawsuit against us concerning the Zohar CDOs.

By turning to litigation rather than continuing to work with us and other creditors on a realistic consensual restructuring that would enable the Zahor transactions to meet their obligation, we believe that Ms. Tilton has embarked on yet another ill advised effort to deflect attention from her own performance and legal issues. While we will vigorously defend ourselves against this lawsuit, which we believe is meritless, we will, at the same time, continue with our efforts to find a solution that we believe will be in all the parties' best interest.

Okay, thank you. That's all for me.

Your next question comes from the line of Geoffrey Dunn with Dowling & Partners.

Thank you. Good morning. Bill, it looks like the Chicago Board of Ed has sequentially got bumped on to the BTIG list. Can you just give us your updated thoughts on that credit and the Chicago situation overall, please?

Sure. As you know, both Board of Ed and the City of Chicago are two that we've been watching quite carefully. They have both been getting fair amount of attention in the press. We think that the Board of Ed clearly has a lot of challenges. We do have, or believe that when you look through the details of that credit that we have the appropriate security and safeguards that ultimately the credit will be fine.

But it is going to have a lot of uncertainty around it, as you know, they've got issues with underfunded pensions. They are also looking to the state for some financial support. The state obviously has had an impasse with its budget that we're now entering month number five. And so there's just a lot of uncertainty exactly how things are going to go forward. In addition, we obviously have the situation with the teacher's union, which is unsettled at this point as well.

So, part of the reason for the rating is just all the uncertainty that I referred to. When you get down to actually the way the credit will play out, we believe it will be fine. But really, it's the uncertainty that played into the decision.

Now, I think last quarter was pretty uncertain as well. Is it just that this keeps dragging on that finally hit that trigger to downgrade it?

Exactly. It becomes a cumulative effect and the time that all these things are out there. I think that it just got it to the tipping point.

All right, great. Thank you very much.

(Operator Instructions)

Your next question comes from the line of Nagendra Jayanty with Claren Road.

Thanks for taking the question. I just want to follow up on something that Peter Taurasi at Barclays had asked on reserving for PREPA. So when you say that you have done the appropriate case, the scenario analysis, does that mean that you have taken reserves above contingency reserve levels on PREPA?

We did. We acknowledged that we had taken reserves on PREPA in second quarter of 2014. So, there's nothing that we've learned in this quarter that changes our -- the view that we took at that point.

Okay, that is the question I was asking. Okay, and then -- thanks for that. And the second thing is on the Credit Suisse put back case, I know that we are waiting for discovery to conclude in February 2016. But are there intermediate dates before then that allow for some settlement or other discussions to occur? Or can you give us a little more color on how the case is going?

We're in the process right now of going through expert reports and reviewing those reports and responding to those reports. Settlement discussions can take place at any time. It typically will come a bit later when positions and all of the facts are fully documented. Typically, the time when both sides sit back and say, how does our case look versus their defense of the case. So I would not -- I would be surprised if there is any settlement this year, though the prospects for when next year remain positive.

Okay, thank you.

You have a follow-up question from the line of Brian Charles with RW Pressprich.

Hi, I just want to address the surplus notes one more time. What -- is there anything -- any comment you can give on how you're trying to maximize value for the surplus notes over time? When you mentioned that, I thought certainly believe that, but as it stands, I just don't have a lot of clarity around different options you might be pursuing.

And I'm actually in absent of any kind of guidance. I'm wondering to what extent you might be able to get past January 2017. Not just to maximize value for the surplus notes, but just to make sure that the policy holders at MBIA Corp. are not left to their own devices.

Policyholders come first and surplus note holders come second, if there's any residual value that would accrue to our shareholders. What we are trying to do is manage each of the exposures. We continue to pursue optimizing early terminations or commutations. We are working very hard, as Chuck noted, to keep our expenses to an absolute bare minimum.

We're working and pursuing both the litigation against Credit Suisse and also a litigation against JPMorgan and we're continuing to look at increasing value at MBIA UK. We're working through our expenses of older operations, such as in Mexico and in Spain to minimize those costs. And we continue to believe that there are adequate resources at -- within the Zohar credits if they were actively put on the market and put up for sale that the impact on Zohar 1 or Zohar 2 will be minimal and would allow us to get past that January 17 date.

There is a large number of companies involved in the Zohar transactions. More than a couple dozen are generating very positive EBITDA and could be sold in an orderly manner over the next two or three years and that should allow us to minimize any liquidity impact on MBIA Corp. and eventually then have some residual value which we can maximize for the surplus note holders.

It's -- is it not -- it's incorrect to think that there's no value in those underlying companies. Even Miss Tilton goes to great lengths to explain the value of those companies. And we feel that there's a possibility that an answer is possible. We felt that for a long time and we're going to continue to work towards that resolution.

Okay. All right, and I could see that, in there is value at Zohar, but just to the extent you would have to make a payment in January 2017 and then get substantial recoveries after that. It seems like it's not a solvency problem or a capital problem, but there would be a liquidity issue you need to address, unless there's some way you could bridge that date in January 2017 with the understanding that payments would be coming into MBIA Corp. from the disposition of the Zohar assets down the road. Are you -- is there a way you can bridge that gap to get past January 2017 without hitting a liquidity shortfall, which you might hit if you are unable to reach an agreement beforehand?

January 17 is a long -- 2017 is a long ways away; there's going to be a lot of development between now and then. So I think it's premature to try and guess what we might do.

Okay. That's fair enough and I'm sorry to keep pinning you down on this. But I guess I'm -- if there's any guidance you can give on alternatives, if you can't reach an agreement before January 2017, is there something you can do to bridge the gap to allow you to avoid receivership, which could potentially happen if you have to make that $800 million payment? Is there some arrangement you can come up with, or an agreement such that the resolution of the underlying assets after January 2017 can be agreed upon in some manner with (multiple speakers) basically your policyholders.

I think we've already answered that question.

Okay. All right. Well, thank you.

At this time, there are no further questions. I will now turn the call back to management for closing remarks.

Thank you, Crystal. Thanks to everyone who joined us for today's call. Please contact me directly if you have any additional questions. We also recommend that you visit our website, MBIA.com for additional information on our Company. Thank you for your interest in MBIA. Good day and good-bye.

This concludes today's conference call. You may now disconnect.