Ambac, MBIA May Discover Clients No Longer Need Them: Joe Mysak... Nov. 13 (Bloomberg)
The next two weeks will be critical for bond insurers, as states and municipalities assess whether it still makes sense to get their bonds insured.
In at least one corner of the market, it looks like the rapacious appetite for insurance is easing.
Insurance now covers about half of the new bonds sold. It saves issuers money. By insuring its bonds, an A-rated issuer can borrow money using an insurance company's AAA rating. This allows them to borrow money at almost the same rate as those rare issuers naturally rated AAA.
Insurance also makes municipal bonds easier to sell. It's one thing to describe a municipality and the various revenue streams it is going to use to repay a loan, quite another to say, ``This bond is insured by MBIA or Ambac,'' so what do you have to worry about?
What everyone is worried about now is just how long the major bond insurers are going to have their AAA ratings.
The insurers, which mostly began life by guaranteeing the timely repayment of principal and interest on good old safe and secure municipal bonds, branched out in recent years to include collateralized debt obligations.
Analysts and investors are concerned that those bonds, some backed by subprime mortgages, are going to default, and leave the insurers on the hook for billions of dollars in debt-service payments.
Stock Market
The municipal market hasn't really worried much about the bond insurers. The stock market has.
Since the beginning of October, the share prices of the two biggest bond insurers, MBIA Inc. and Ambac Financial Group Inc., have driven off a cliff. MBIA had lost 49 percent from its high, while Ambac was down 63 percent as of Nov. 9. Equity analysts have downgraded the stocks, and the rating companies say they are going to reexamine how the subprime crisis has affected them. Some of the insurers might have to raise more money to keep their top credit ratings.
Analysts and investors, and this includes the short sellers who have made a fortune on the stocks so far, are concerned that there is too little money in the pot to cover a world of claims. MBIA and Ambac have lent their AAA guarantee to more than $1 trillion in securities, which easily translates to, say $2 trillion if you count all the principal and interest payments. The insurers say they have about $30 billion in claims-paying resources.
The municipal market hasn't worried about this situation. I took a look at last week's negotiated and competitive bond sales calendars to see if the current whirlwind surrounding the insurers has made a dent in their ability to win business, at least in the municipal market.
Insured Penetration
And the answer is: Maybe.
I have been surprised to find just how blithely the bond market, including issuers, underwriters and investors, has been about the insurers' mess.
Of the 150 transactions on the negotiated calendar last week, 68 carried insurance. That's more than 45 percent of the number of deals. During the same week last year, 71 of the 149 negotiated deals were insured -- almost 48 percent. A handful of these were school bonds guaranteed by the state of Texas's Permanent School Fund, but still. What's going on here?
Well, for one thing, negotiated deals are usually set up pretty far in advance. The hysteria over the bond insurers only reached fever pitch a couple of weeks ago. In a negotiated transaction, bond issuers choose the underwriter of their bonds, and the underwriter gets to work selling them. On the actual day of sale, the bonds are already entirely sold, in most cases.
Some Reluctance
On the competitive side of the calendar, where issuers set a date and underwriters bid for the bonds at auction, the situation was different. Of the 84 issues on the calendar, only 34 carried insurance -- about 40 percent.
In the negotiated market, the issuer usually pays for bond insurance; at auction, it's the underwriter who usually pays.
And now the clincher: On the competitive calendar for the same period last year, 57 of the 91 transactions were insured -- almost 63 percent.
At auction, then, there seems to be some reluctance to use insurance. This development bears watching.
The municipal market seems not to have digested quite yet the implications of one of the major insurers losing its AAA rating, and how this might cause some dislocation.
Maybe the market could handle one of the smaller, boutique insurers losing its top rating. I find it difficult to believe that even this inert market would shrug off one of the big companies losing its AAA rating.
In the meantime, the next two weeks should tell a tale, as issuers and investors sharpen their pencils and see whether insurance is adding any value. My bet is that there will be a sharp discount in the value of an insured AAA rating, until there is more clarity on the subprime issue.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
