MBIA: Tax Arcana

Nov.19.09 | About: MBIA Inc. (MBI)

MBIA (NYSE:MBI) recently filed an 8-K with the SEC, explaining its current situation with regard to the availability of tax refunds under the recently enacted 5 year NOL carryback provisions. I have read it over several times and I am still scratching my head in puzzlement.

From the conference call (see transcript) I knew that they have approximately $500M of available tax refunds under the new law, but for 2008 they were not in an NOL position, while 2009 to date had a small NOL.

Now it develops that under section 382 of the IRS code there are limitations on NOL carrybacks, based on the increase of the aggregate ownership of 5% shareholders over a three-year period. As of 10/31, this increase stood at 43%, and if it goes to 50% by the end of the year the NOL can't be utilized.

Meanwhile, certain shareholders have notified the company of increased positions, while others have notified the SEC of decreased positions. Looking at recent filings, Third Avenue Management filed an SC 13G reporting their ownership was well under 5% as of 10/31. It had been substantially higher.

Finally, MBI still has $115 million on their share repurchase plan, and could buy shares at any time, which could push the increase in 5% ownership over the top. Or they could do a rights offering or take other actions in an effort to preserve the tax benefits.

I thought it was so simple, the company could just jack up their losses, buy back a heap of undervalued shares, then fund the purchases by getting a tax refund. Sadly, it doesn't work that way.

Disclosure: long MBI