S&P Cuts MBIA Credit Rating on Potential $700M Exposure to Patriarch CLO

Jun 16 2016 | 11:27pm ET

Rating agency Standard & Poor's has cut the credit rating of bond insurer MBIA Insurance one notch from B to CCC at least partly due to the ongoing travails of private equity company Patriarch Partners and its CEO, distressed asset maven Lynn Tilton.

S&P cited concerns that MBIA will have to shell out $700 million to settle claims against one of Patriarch’s CLO pools, Zohar II, and noted that its outlook for the company’s rating is negative. 

The fund is one of three Zohar pools at the core of a raft of investigations and litigation against Patriarch and Tilton. They include U.S. SEC civil fraud charges alleging lack of disclosure about the poor performance of the assets held within the pools, the bankruptcy filing earlier this year of one of them (Zohar I), and a $45 million lawsuit by one of the pool’s investors, Norddeutsche Landesbank.

The Zohar funds in question raised more than $2.5 billion beginning in 2003 by selling securities to investors and using the proceeds to acquire commercial debt, essentially making them large pools of corporate loans made or purchased with investor funds and used to provide financing to Patriarch’s portfolio companies. 

As the insurer for Zohar II, MBIA could face a claim of around $700 million when insured notes issued by the pool mature in late January of next year, according to S&P’s statement. “Management's plan to meet MBIA Corp.'s near-term liquidity needs includes various actions, none of which on its own would be sufficient to meet the potential claim payment on Zohar II,” S&P said. “If management is successful in meeting the Zohar II payment, [we believe] the company's liquidity will likely remain weak.”

Tilton recently lost a closely followed case in which she argued the use of in-house administrative law judges by the SEC is unconstitutional, with the U.S. Second Circuit finding that such administrative cases must end before they can be challenged on constitutional grounds. The ruling clears the way for the SEC’s civil fraud case to continue. 


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