Greg Diamond - MD, Investor and Media Relations Jay Brown - CEO Bill Fallon - President and COO Chuck Chaplin - President, CAO and CFO.

Brett Gibson - JP Morgan Wayne Cooperman - Cobalt Capital Andrew Gadlin - Odeon Capital Group Brian Charles - RW Pressprich Peter Troisi - Barclays Geoffrey Dunn - Dowling & Partners Nagendra Jayanty - Claren Road.

Welcome to the MBIA, Inc. Third Quarter 2015 Financial Results Conference Call. I would now 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 the 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 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 our 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 items may be found in our most recent 10-K, 10-Q, our financial results press release 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 is our Safe Harbor disclosure statement. Our 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 introductory comments. Then Anthony McKiernan will join jay and 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 insurance recovery resulting in an above average 2014 operating income.

In addition to adequate earnings, we continued 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 guide lines 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 advisors 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 the Puerto Rican credits.

In the meant time, the ebb and flow of news reports and analysts 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’ve now repurchased shares in each of the last six quarters.

In the third quarter, we repurchased 19 million shares for a 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 extraordinary 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 has 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 New Port 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, formerly the Chief Financial Officer of the City of Chicago to be a director.

Both of these new directors have 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 run-off and National’s new business activities. First Puerto Rico.

As most of you know our biggest exposure in Puerto Rico is the PREPA, and we continue to strongly believe that the authority has all the tools it needs to address its operational 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 advisors, 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, it 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 its operating expenses and debt service and that they impose fixed dead line 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 4.2 cent rate increase was well founded, and we’ve filed an appeal with the Puerto Court of Appeals.

Meanwhile, it’s been reported in the press that PREPA’s Board has recently signaled the willingness to consider increasing rates as one element and a reorganization and that the Governor’s authorized such an increase in connection with the restructuring of PREPA’s debt.

PREPA’s 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 insure $273 million in Commonwealth guarantee GDP 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 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 natural 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 has laid out a game plan calling for bankruptcy access for Puerto Rico and its instrumentalities, but it 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 a Commonwealth and its instrumentalities to have broader powers to impair obligations owed to long term investors, many of whom are individuals, retirees and other mainstream investors in Puerto Rico and throughout the United States.

Hedge funds which got a lot of attention at the senate hearings and at 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 if anything tangible and timely will come from the federal government.

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 runoff. We expect the insured portfolio continue to amortize and free up excess capital.

We estimate that 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 [passport] on Puerto Rico. This would include seeking approval for a special dividend to the holding companies.

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 advisor to bankers who’ll generate a lion share of new business opportunities.

In total, we wrapped $129 million of power, notably we wrapped eight deals in the secondary market this quarter, which was our first secondary market deals we’ve insured since we reentered the market. Since the end of third quarter, we’ve been mandated on eight more deals totaling $98 million at par.

We bought Tom Metzold on Board this quarter who joined us from Eaton Vance, and he enhances our secondary market capability, as well as giving us new insights in to 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. Our operating income was $24 million in the quarter, compared to $120 million in the year ago quarter. As Jay has noted, the comparison at 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 operating income was about $31 million.

The decline to $24 million in this year’s third quarter is due to lower premium earnings related to the amortization of National’s insured portfolio. Operating income per share was $0.15 compared to $0.63 in the third quarter of 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 of minutes to talk about performance at the segment level. National’s operating income was $48 million compared to $70 million in last years’ third quarter.

The variants to last year is primarily driven by the E&L recovery and a 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 ensured. The favorable trend in terms market acceptance continues.

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 in to 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. That was statutory capital growth and a reduction in gross power 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.

And 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 of 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 leveled 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 extra releases in 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 buybacks beyond this authorization, until we are in a position to receive extraordinary dividends. Our liquidity and leverage objectives will continue to define the limits of our repurchase activities.

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’d 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.

share of the recovery from the E&O carriers, plus the insured portfolio has declined by merely 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 expect voluntary prepayments and an increase in loss on the one CMBS pool in which we have been making payments and then miscellaneous smaller losses on a large number of policies.

Second lien prepayments are affected by interest rates, home value appreciation and by the fact that many of the loans in the securitization are beginning their amortization periods. MBIA Corp. statutory capital was $813 million at September 30, 2015 and its liquidity position was $399 million.

While the insured portfolio was much more stable than in the past, there continues to be areas of risk. One of the areas of greatest uncertainty is around 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 towards maximizing the margin of safety for policy holders 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 2014s 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 towards a stable operating future for your company and enhancement of value through share repurchase. At this time we’d be happy entertain any questions you may have. .

[Operator Instructions] our first question comes from the line of Brett Gibson with JP Morgan. .

During your prepared remarks you mentioned that you expect Puerto Rico to pay the December maturity, but can you give us a little more detail about the liquidity and resources that the GDB has in advance for that December 1 maturity, so that’s question number one.

Question number two is related to, what were the 50 million losses that were booked at Corp. during the quarter, can you just outline what those were and then any additional color on Zohar that you have, and then finally just related to buyback.

So the company has bought back an enormous amount of stock year-to-date, and 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. specifically the uncertainties on insured obligations and the non-payment status of the surplus notes.

And so I guess 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 on your thinking anyway?.

Brett, it’s Bill, with regards 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’s being provided.

Best we know that 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 will be paid we think that is the Commonwealth and GDB get in to 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 of other programs 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’d asked secondly about MBIA Corp. and its incurred losses in the quarter. So 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 sort of 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 expectation 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’re stopping 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 under water 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 that 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’s 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’s 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 that 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.

And then finally, you’d asked about share buyback and how we get comfortable with kind of our balance sheet position in the context of share repurchase. And 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 level that’s roughly consistent with three years’ worth of our operating expenses at the holding company level.

It’s setting the minimum level of liquidity is 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 there are 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, what 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 that 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 buybacks 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 leverage target by year-end 2018.

So we think we are in a pretty good position there and frankly it’s driven by the robust cash flow that has been coming in to the holding company. .

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

You kind of covered most of my questions, but 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’s two parts to that. As we mentioned Wayne, inside National you are absolutely right; all the metrics that you would look at continue to get stronger and stronger. You will get 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 part of that capital very shortly, which if you back historically you would never see things like that in [inaudible] only.

So that’s part of it and you’re absolutely right, that’s going to continue to get stronger and stronger, and as we mentioned that builds up excess capital, we tend to compare it to what’s 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 a write dividend, the tax payments which then go in to the tax escrow and as I mentioned, when we get clarity on Puerto Rico, we will be seeking an approval for special dividends from National to the holding company, which will provide additional financial flexibility to holding company, either buy back stock, repay debt etcetera.

.

I mean obviously because buying back stock at a quarter a 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 the line of Andrew Gadlin with Odeon Capital Group. .

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

Yeah that was the tax legislation that they passed on 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 sort of at their disposal.

So while there’s still some work to be done with regard to how they restructure HTA, and there were some ideas floated early 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 towards a PREPA offering isn’t it. .

Correct. That was the idea earlier in the year that was floated and there’s some details around that. As you know they never actually move forward with that. I think other events took priority in particular in PREPA, and now I think the focus is on GDP 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 core for a second, in the past you’ve been willing to comment on what you think of the pricing level of the surplus notes, given if they’ve come down to where they have low 40s. How do you look at those today and the ability to do something with the holders there. .

It’s closer, not that yet at a level that makes sense to use. But it certainly has moved directionally in the last two or three quarters to where it’s getting close to where the transaction might be feasible. .

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

Just regarding Corp. when thinking about the negotiations with Patriarch Partners, now that it’s reached a stage where there is 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 million of maturity in January 2017. .

Given that there is now litigation price, we don’t really feel comfortable talking about our strategy, beyond the fact that we expect to make a - if Patriarch doesn’t 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 Patriarch in the near future. .

But just regarding Corp. though can you discuss any alternatives you are thinking about regarding outside of Patriarch pursuing liquidity options for Corp. in case you do have to make an $800 million payment in January..

Yes, a non-cash asset which we can monetize, we’ve got three or four different plans that we are prepared to pursue if that’s an appropriate actions, but right now we prefer not to discuss those till it takes place. .

Would one those options potentially involve in a support from the holding company?.

No..

You’re not considering that. Just wondering because 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’ve used around $300 million for stock buyback and you’re planning on using another $100 million.

I just wonder if because of that value that has been secured from Corp. are you willing to make any statement that you’d be willing to support the stakeholders at Corp. if it comes to that, if you need to do that in January 2017..

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

Your next question comes from the line of Peter Troisi with Barclays. .

Just a question on your PREPA exposure, you mentioned the appeal in the prepared remarks. You disclosed in the 10-Q that the MBIA and Assured Guaranty filed a petition to intervene in to the Energy Commissions proceeding.

Can you expand on what that was?.

The couple was required to essentially put together a long term operating plan and that’s what was filed. The regulation then allowed 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 Assured they have another specially 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 day at which they were going to hear from those parties.

So it is a way for us to put forth ideas in terms of now PREPA could be restructured operationally to improve things going forward for their customers. So that’s the process there. .

And then 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 have gone through the process in terms scenarios and done the appropriate calculations for the reserving..

And 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 Corp.

[approvals]?.

Basically, yes. .

Okay, great.

And 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 the litigation, the only thoughts I would have on it, given the impending maturity and the discussions we’d had today, we were disappointed that Patriarch file the lawsuit against us concerning the Zohar CDOs.

By turning to litigation rather than continuing to work with us another creditors and a realistic consensual restructuring that would enable the Zohar 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. .

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

Bill it looks like the Chicago Board of Ed sequentially got bumped on to the BIG list. Can you just give us your updated thoughts on that credit and the Chicago situation overall. .

Sure. As you know both Board of Ed and the City of Chicago we’ve been watching quite carefully, both of them getting fair amount of attention in the press. We think that the Board of Ed clearly has a lot of challenges.

We do have our belief that when you look through the details of that credit that we have the appropriate sort of 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 under-funded pensions, they also are looking to the state for some financial support, the state obviously had an impasse with its budget that we are entering month number five, and so there’s just a lot of uncertainty exactly how things are going to go forward.

In addition, you 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 it really is the uncertainty that played in to the decision. .

I think last quarter is pretty uncertain as well that just keeps going, dragging on that kind of finally hit that trigger to downgrade it. .

Exactly, it become cumulative [spec] and the time that all these things are out there. I think it just got us to the tipping point. .

[Operator Instructions] and your next question comes from the line of Nagendra Jayanty with Claren Road..

Just wanted to follow-up on something that Peter Troisi, 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 reserves level on PREPA?.

We acknowledge 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 view that we took at that point. .

Okay that did. That was the question I was asking, okay.

And then the second thing is on the Credit Suisse putback case, I noticed that we are waiting for discovery to conclude on February 2016, but are there intermediate dates before then that allow for some sort of settlement or sort of other discussions to occur or could 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 review 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.

That’s typically the time when both sides sit back and say, how does our case look versus their defense of the case. So I would be surprised if there is any settlement this year. Though the prospects for one next year remains positive. .

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

I just want to address the surplus notes one more time. Is there any comment you can give on how you’re trying to maximize value for the surplus notes overtime. When you mention that I would 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 am actually in absence of any kind of guidance. I am wondering to what extent that you might be able to get pass 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. .

Policy holders come first and surplus notes holders come second and if there is 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 termination or commutations. We are working very hard as Chuck noted to keep our expenses to an absolute bear minimum.

We are working and pursuing both the litigation against Credit Suisse and also litigation against JP Morgan, and we’re continuing to look at increasing value at MBI UK.

We are 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 within the Zohar credits if they were actively put on the market and put up for sales that the impact on Zohar 1 or Zohar 2 will be minimal and would allow us to get past that January ‘day.

There are a large number of companies involved in the Zohar transactions. More than a couple of dozen are generating very positive EBITDA and could be sold in order lay matter 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 incorrect to think that there’s no value in those underlying companies. Even Ms. Tilton goes to great lengths to explain the value of those companies. And we feel that there’s possibility that an answer is possible.

We felt that for a long time and we’re going to continue to work for that resolution. .

And yeah I could see that, and that there is value at Zohar, but just to the extent you would have to make payment in January 2017 and then get substantial recoveries after that, 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 January 2017 with the understanding that payments would be coming in to MBIA Corp.

from the disposition of the Zohar assets down the road.

Is there a way you can bridge that gap to get past January 2017 without hitting on liquidity shortfall which you might hit if you’re unable to reach an agreement beforehand?.

January 2017 is a long way, 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 it was hard to keep pinning you down on this.

But I guess if there’s any guidance you can give on alternatives if you can’t reach this 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 sort of arrangement you can come up with, when agreement such that the resolution of the underlying assets after January 2017 can be agreed upon in some sort of manner, with basically your policy holders..

I think we’ve already answered that question. .

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

Thank you Crystal. And 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 todays’ conference call. You may now disconnect..