MGIC Investment Corp.'s shares jumped Wednesday following the launch by the private mortgage insurer of a major offering of stock and bonds.
THE SPARK: The Milwaukee company said Tuesday that it was selling 135 million shares of common stock and $350 million of convertible senior notes in a public offering. It offered underwriters the option to buy an additional 15 percent of the number of shares offered and an additional $50 million of the notes.
MGIC said it plans to use the proceeds for general corporate purposes, including boosting the capital of its insurance unit Mortgage Guaranty Insurance Corp.
THE BIG PICTURE: Mortgage insurers got battered when the housing bubble burst, but their stock has been hot amid a recent recovery in the housing market.
Mortgage insurance is typically required for borrowers who are unable to afford a down payment of 20 percent. The industry suffered mounting losses as mortgage defaults skyrocketed during the housing meltdown, leading to a spike in claims. Because the fortunes of mortgage insurers are tied closely to those of the housing market, an uptick in housing sales means more business for the companies that back the mortgages used to buy them.
Mortgage insurers like MGIC are seizing on this willingness of investors to believe in the industry again as an opportunity to get them to invest in stock or debt.
THE ANALYSIS: Barclays analyst Mark DeVries upgraded his rating of MGIC earlier this week, saying that some of the risk the company was facing is behind it.
The industry is benefiting from more profitable new business, and the losses left over from the housing market crash are gradually making their way out. The analyst expects the industry could return to normalized earnings by 2015.
Additionally, the recent rise in MGIC's stock price will limit the decline that typically results when a company issues new stock.
DeVries raised his rating on MGIC to "Overweight" from "Underweight" and set a price target of $8.
Susquehanna Financial Group analyst Jack Micenko, who rates the stock "Neutral," said he won't change his estimates until the transaction prices.
"We believe the offering, while significantly dilutive to share count, will allow the company to leverage a portion of the capital into new business, which would be accretive to our current estimate in 2015," he wrote in a note.
SHARE ACTION: MGIC's shares increased nearly 9 percent, or 47 cents, to $5.81 in afternoon trading. Its stock traded as high as $6.19 earlier in the day, its highest level since July 2011.
These gains follow a steady increase in value since August, with the stock more than doubling since closing at $2.60 on Feb. 25.