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Kyle Bass Wins Big on MGIC Turnaround

January 12, 2012 | About:
matsandalex

matsandalex

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A few months ago, hedge fund manager Kyle Bass revealed a large stake in mortgage insurer MGIC (MTG).

At the time he said MGIC is different from (PMI Group Inc. (PMI) because MGIC has a "pretty big positive equity position. We think they’ll be one of… the last ones standing; we’re in it for the long haul.”

In a later interview Bass mentioned that there is little downside risk left in the U.S. housing market.

Bass studied every housing bubble in the past 100 years and realized that it takes about 7 years after prices peak for there to be a recovery. Since house prices peaked in 2006, one could guess that a housing recovery could start in 2013.

Bass said, "You can see that the pig has moved through the python in terms of U.S. housing losses."

Bass purchased the shares for $2.50 on Oct. 31, 2011. He later said that he would have purchased more of the company if he had been allowed to. MTG directors have created anti-take over provisions that prevent hedge fund managers from gobbling up large stakes of MTG.

In the last two months, shares of MTG have rocketed to $4.30 per share.

The key question for the company will be what liquidity ratio regulators require going forward. MTG can be profitable with 25x leverage although it is expected that the company will be granted waivers and will be allowed to operate with 30x risk to capital ratio.

Bass has been particularly bearish on the European debt crisis and expects a number of European debt defaults in 2012. Previously, he profited from the collapse of the U.S. subprime industry.

Rating: 2.7/5 (14 votes)

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