MBIA is securitizing a USD2.5 billion chunk of its collateralized debt obligation portfolio to manage its mark-to-market risk. The risk is being transferred through a planned synthetic CDO of CDOs that the monoline is readying with Deutsche Bank, according to several officials who have seen the deal. The move is thought to be the first attempt by an insurer to manage its mark-to-market risk in this way and will likely pave the way for other protection sellers to follow suite. Debra Descloux, spokeswoman at MBIA in New York, and Harriet Benson, spokeswoman at Deutsche Bank, declined comment.
The CDO of CDOs, dubbed Synthesis, will actively manage MBIA's book, according to officials. The majority of the deal will consist of junior investment grade CDO positions, with high-grade CDOs, asset-backed securities and collateralized loan obligations also in the portfolio.
The structure is an interesting attempt to manage mark-to-market risk, which is the bane of many insurers, noted one official that has seen the deal. The structure is designed to shift the volatility of marking the positions to market, which can impact quarterly earnings statements, he said. In return MBIA will give up some of the premium on the portfolio. Monolines are required to mark all credit-default swaps to market.
