Credit Pressure Flters Down To Muni Market Bond Insurers' Exposure to Troubled Mortgages
Ripples Through System
By TOM LAURICELLA and KAREN RICHARDSON
November 16, 2007; Page C1
The $2.5 trillion market for tax-free municipal bonds, a popular investment for many individual investors, is the latest unlikely corner of Wall Street to be roiled by the nation's real-estate and credit-market woes.
In recent weeks, prices on municipal bonds have moved lower while their yields have been rising, making them cheap in some investors' eyes. Meanwhile, several new municipal-bond issues have been hung up. Bond insurers -- important participants in the muni market -- have also seen their share prices tumble, and the market's assessment of their own likelihood of default has worsened dramatically.
"It's all the result of the concerns and fears about the impact of things going on in other bond markets," says Daniel Loughran, a portfolio manager at OppenheimerFunds.
In this case, the contagion revolves around the bond insurers, which are little known outside Wall Street and operate behind the scenes to provide insurance guarantees to issuers of municipal debt. If a city or hospital issuing a tax-free bond should struggle to pay, these bond insurers in some cases back them up.
The issue is that muni-bond insurers such as Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. in recent years also have become backers of debt instruments holding now troubled mortgage securities. Because of that exposure, the insurers are under pressure from rating services to raise capital to cover potential losses on those securities or face downgrades.
Ambac's shares, for example, have fallen 48% in the past three months, and they dropped 7.2% yesterday to $28.24 as of 4 p.m. in New York Stock Exchange composite trading, after rising in recent sessions.
Ratings downgrades may have a direct negative impact on the muni debt they also insure, potentially even triggering forced selling by some investors.
Forming one especially vulnerable part of the market are complex short-term securities owned by tax-exempt money-market funds that are guaranteed by the insurers and backed by brokerage houses that have mortgage-backed security woes of their own.
In an unusual divergence, the Lehman Brothers Municipal Bond index is down 0.6% during the past month while the broad Lehman Brothers Aggregate index, which tracks taxable bonds, including Treasury securities, corporates and some mortgage securities, is up 0.5%.
These concerns are also affecting the market for new municipal debt, where in recent weeks, several bond deals were pushed back rather than take their chances in an uncertain market: the Puerto Rico Public Buildings Authority's $900 million deal; a $540 million deal by Miami-Dade County, Fla.; and a $960 million deal from Chicago's O' Hare International airport.
Even though 2007 is headed toward a record for muni issuance, analyst Bob Nelson at Thomson Financial's municipal-market data group says, "We've seen a slowdown over the past few weeks with new issues as buyers have backed away, in part because of concerns about the financial guarantors."
Worried bond insurers are taking matters in their own hands. Ambac executives hit the road yesterday to meet with municipal-bond issuers, financial advisers, investors and investment banks across the country to try to calm fears about the strength of their firm's balance sheet and credit rating.
"The muni market is really the retail [or individual] investor, who does a lot of reading of the papers and gets concerned about things," says Peter Poillon, Ambac head of investor relations.
The recent decline in muni-bond prices marks the second time in recent months when investors have left the market in favor of the safety of U.S. Treasurys. This time, the weakness of the market can be more clearly linked to concerns about the bond insurers who guarantee about half of all muni debt.
It began last month, when mortgage-backed securities went into a freefall and rating agencies warned that the financial strength of bond insurers would be reassessed, saying their triple-A credit ratings -- the highest such mark -- could be lowered.
For example, Moody's Investors Service and Fitch Ratings said it was likely that Financial Guaranty Insurance is among the most likely to face a capital shortfall that could imperil its rating. In 2006, the firm guaranteed about 15% of all new public-finance debt, according to S&P. |
