IPO Risks Rise as Bass-Carlyle Vie With Goldman-Soros

NMI Holdings Inc., the mortgage guarantor backed by Kyle Bass, Carlyle Group LP and BlueMountain Capital Management LLC, is seeking to be the first U.S. insurer since 2009 to file an initial public offering without posting a profit, as demand climbs for housing-related investments.

The firm had sold coverage on 22 individual loans at the end of September, is working to get its computer system running and will be unprofitable at least through next year, according to the IPO filing. NMI also competes with Essent Group Ltd., a profitable company whose investors include George Soros and Goldman Sachs Group Inc., thats pitching its own IPO.

Investor appetite for home loan guarantors is climbing as the U.S. property market rebounds at the fastest pace in seven years and the government retreats from backing mortgages. Still, NMIs IPO filing carries warnings more often found in Internet and biotechnology offerings, said Josef Schuster, founder of a firm that tracks public offerings.

In financials, its a rare occasion that you see such unseasoned deals, Schuster said.

In the Oct. 8 document, Emeryville, Calif.-based NMI described itself as a development stage corporation started in 2011. We have a history of losses and expect to continue to report annual net losses in the near term, the company said. Our ability to achieve profitability, if at all, is uncertain.

Mary McGarity, a spokeswoman for NMI at Strategic Vantage, declined to comment before the share sale. NMI is pursuing the IPO because its the fastest way to increase the number of holders and secure a stock exchange listing, satisfying obligations to investors, according to the filing.

Its been almost five years since an insurer filed to go public with a net loss in its most recent reporting period, according to data compiled by Bloomberg. That firm, Penn Millers Holding Corp., was a property casualty insurer, which traced its history to 1887. Penn Millers was acquired by Ace Ltd. for $107 million in 2011.

NMI was created when rivals were vulnerable because of the housing crash and there was less capacity in the market for mortgage insurance, which covers losses when borrowers default and foreclosures fail to recoup costs. Coverage is typically required when borrowers pay less than 20% of the cost of their home upfront.

The further we get from the crisis, the more uphill battle it is to gain customers, Jack Micenko, an analyst at Susquehanna International Group LLP, said by phone. If youre an issuing bank, your sense of urgency of adding yet another counterparty is much, much lower.

Led by Chief Executive Officer Bradley Shuster, NMI raised $510 million from investors in a 2012 private share sale led by FBR Co., which is also managing the IPO. It got regulatory approval this year from Fannie Mae and Freddie Mac, and began selling coverage in April.

Claren Road Asset Management LLC, the hedge fund majority-owned by Carlyle, is NMIs largest backer, with a 12.6% stake. Basss Hayman Capital Management LP has 9.9% and BlueMountain owns 9.8%.

Spokesmen for the investment firms declined to comment.

From its May 2011 founding through June, NMI has lost $57.1 million, according to the regulatory filing. Shareholder equity, a measure of assets minus liabilities, was $465.5 million.

In comparison, Essent has posted operating profit for three straight quarters after getting approvals from Fannie Mae and Freddie Mac in 2010, and now controls 12% of the traditional private mortgage insurance market. Its investors include JPMorgan Chase Co., the No. 2 mortgage originator, which has an 8.9% stake. Pine Brook Road Partners is the insurers biggest investor and holds 22.7%. Goldman Sachs owns 11.3%.

NMI or Essent would be the first U.S. home loan guarantor in almost two decades to go public. The IPOs would be the latest way for investors to bet on an industry thats been drawing capital this year, after the financial crisis forced almost half the companies out of the business. Radian Group Inc. and MGIC Investment Corp. raised fresh cash this year, helping rebuild capital drained when housing crashed.

After declining for six straight years, home prices climbed about 7% in 2012, and are up another 11% this year through July, aided by mortgage rates that have been pushed near record lows by the Federal Reserves stimulus program.

Mortgage originations to purchase one-to-four family homes are projected to rise 22% this year to $616 billion, and another 14% in 2014, according to a Mortgage Bankers Association forecast. The figure was $1.5 trillion in 2005.

Theres pretty good pent-up demand, said Rick Lane, who helps manage the $867 million FMI Focus Fund as president of Broadview Advisors LLC. You just wont find a more leveraged play on housing than mortgage insurers.

The Federal Housing Administration, which took on a bigger role in backing home loans in the crisis, is also ceding business to private insurers by raising prices for its coverage.

Crisis-era losses pushed three mortgage insurers from the market and weighed on the financial-strength ratings of MGIC, Radian and Genworth Financial Inc. Thats helped convince lenders its a bad idea to rely on just one home loan guarantor, said Sean Dilweg, president of CUNA Mutual Groups mortgage insurer.

It opens the door for new entrants to make their case, Dilweg said by phone.

Still, companies need to make sure theyre easy to work with to win business, he said. NMI is still working to integrate its computer system with some programs used by originators, according to its filing.

Its really hand-to-hand combat, Dilweg said. Its pricing, its your service, underwriting, how quickly you can respond to a loan.

NMI reached a deal in July with Fannie Mae to cover a pool of about $5 billion of mortgages. The premiums on that deal, which started in September, are lower than typical costs for loan-by-loan coverage.

Youre trading off margins for volume within that type of deal, said Rob Haines, an analyst at CreditSights Inc. But it allows you to deploy the capital immediately.