Warburg in $1bn bond insurance deal

The private equity firm has agreed to buy $500 million in common shares of MBIA Insurance, and has backstopped an additional $500 million for a shareholder rights offering to be held in the first quarter of 2008.

Warburg Pincus has added another insurance firm to its financial services portfolio, with its agreement to invest up to $1 billion (€683 million) in publicly traded MBIA Insurance Corporation.

The private equity firm approached the world’s largest bond insurance company several weeks ago and eventually struck a deal to purchase $500 million in MBIA common stock, equivalent to 16.1 million shares at $31 per share. The price represents a 3 percent premium over MBIA’s closing share price on 7 December.

Warburg has also agreed to backstop a shareholder rights offering, expected to occur in the first quarter of 2008, of up to $500 million and will receive pursuant warrants with a 7-year term.

The investment was welcomed by MBIA, which had been looking to “further strengthen our capital position, particularly in light of rating agencies’ pending reviews of residential mortgage-backed securities and collateralised debt obligations transactions that we have insured”, Gary Dunton, MBIA’s chairman and chief executive officer, said in a statement. The company currently has a top credit rating of AAA.

David Coulter, a Warburg Pincus managing director who leads the firm’s financial services investments, said in a statement that MBIA’s “high quality and liquid investment portfolio and the ‘pay-as-you-go’ nature of its insurance liabilities give it a strong liquidity profile”.

Warburg’s insurance company holdings include Aeolus Re and Arch Capital, both Bermuda-based insurance or reinsurance companies.