Posted on 12 Nov 2009
Bond insurers sent shudders through the $2.7 trillion municipal bond market when the threat to their triple-A credit ratings surfaced two years ago. But now that one of the biggest, Ambac, has said it may actually tip into bankruptcy, the market can barely manage a shrug. What's up?
The short answer is that muni buyers and sellers have already largely written off insurers, although Ambac and others were considered crucial to the market not so long ago.
"Within the market itself, the value of them has been nothing," said Daniel Solender, director of municipal bond management at Lord Abbett.
In other words, if bond insurers are a car wreck, muni bond participants are drivers who barely slow down to check it out. Many saw the accident coming.
Credit default swaps have indicated severe distress for the companies since the beginning of the year, market participants said, and bonds that still carry the insurance have traded based on their own credit ratings for over a year.
Bond insurance was designed to help states and cities reduce borrowing costs by guaranteeing the repayment of all principal and interest to investors, who accepted lower interest rates in return for the reduced risk. Issuers paid a fee for the insurance.
The service saved cities and states a lot in interest payments, and made bonds from small municipal agencies and those that sell debt infrequently easier to trade.
In the heyday of bond insurance, seven firms carried the top credit rating of triple-A, and half of new municipal bonds carried insurance.
Now, barely 10% of new muni bonds have insurance. Only one firm, Assured Guaranty, is writing new business, and it bought a competitor. None have retained triple-A ratings; indeed, all but Assured have junk ratings.
Their downfall came after the top insurers branched out to guarantee complex mortgage securities. When the housing market tanked, insurers saw their losses grow, their ratings fall and their clients flee.
In some cases recently, muni bonds have actually suffered because they did have insurance from Ambac or its large rival, MBIA. That may intensify should there be a bankruptcy filing or restructuring, some muni bond investors say, particularly if the bond carrying the insurance is of weak credit quality to start.
"There may be further distress felt by the owners of those securities" who want to unload them, said Chris Ryon, co-portfolio manager at Thornburg Investment Management.
Still, the muni bond market has largely taken its losses. Indeed, it's already withstood the turmoil seen with the weakest of the insurers.
One insurer, Syncora, restructured contracts with its counterparties after the New York State Insurance Department ordered it to suspend all payment of claims to meet capital requirements. Two others, FGIC and CIFG, are violating regulatory capital requirements, according to a recent report from CreditSights, but have managed to avoid being seized by regulators.
Ambac said Wednesday it would have no further comment than its filing on Tuesday, when it raised the specter of a trip through bankruptcy court. An MBIA spokesman on Wednesday pointed to comments made by President and Chief Financial Officer C. Edward Chaplin during a conference call the day before, when he said the insurance unit "has adequate resources to cover all of its liabilities."
MBIA, which this week posted its fifth straight quarterly loss, earlier this year set up National Public Finance Guarantee Corporation to handle only public finance business. Its creation is being challenged by banks, which say such a split is fraudulent. MBIA hopes to have the litigation resolved sometime next year, and then raise more capital and start writing new muni business.