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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (8607)	12/23/2007 1:02:19 PM
From: Mark Adams	Read Replies (3) \| Respond to of 33421

Municipal Debt TOBs May Be `Danger Zone' After SIVs (Update1) By Steve Rothwell Dec. 19 (Bloomberg) -- Debt securities that package municipal bonds may be the next ``financial danger zone'' for banks and the U.S. economy after structured investment vehicles, according to CreditSights Inc. Tender option bonds, companies set up by banks and hedge funds that issue short-term debt to buy higher-yielding municipal notes, manage about $200 billion of assets, the New York-based research firm said in a report. TOBs rely on bond insurers for the highest AAA ratings to get cheaper financing from money market investors. Banks are already committing $100 billion to consolidating or reorganizing SIVs, companies that use commercial paper to invest in longer-dated assets. Declining demand for TOBs may increase borrowing costs for states and cities, crimping U.S. economic growth by as much as 0.3 percent, the report said. ``The cutting edge of TOB technology has come to look more and more like a SIV,'' Christian Stracke, a strategist at CreditSights in London wrote in the report today titled ``The Muni Meltdown -- Are TOBs the next SIVs.'' TOBs hold fixed-rate local government bonds in a trust. They use the securities as collateral to sell floating-rate notes. Buyers of the floating-rate notes accept a lower interest rate because they have the option to sell the debt back to the trust. `Highly Sensitive' The TOBs are ``highly sensitive'' to the credit ratings of bond insurers, CreditSights said. Moody's Investors Service, Standard & Poor's and Fitch Ratings have been reviewing the seven top-ranked bond insurers as losses on securities backed by subprime mortgages accelerate. S&P cut its ratings outlook to negative for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, and downgraded ACA Financial Guaranty Corp. 12 levels to CCC today. Municipal bonds are headed for their worst year since 1999, according to Merrill Lynch & Co. indexes. The slump may persist after securities firms reduced their holdings at the fastest pace in at least 12 years during the third quarter, according to data compiled by the Federal Reserve. TOBs are in a better situation than SIVs because of the municipal bonds underlying the securities, according to Matt Fabian, managing director of Municipal Market Advisors, an independent research firm based in Concord, Massachusetts. ``TOBs may have lost money but the U.S. munis they own have an undeniable clearing price not terribly worse than current levels,'' Fabian said in an e-mail. ``SIVs are invested in assets that have depreciated to maybe 30 cents on the dollar, have no secondary market, and are liable to see massive downgrades below investment grade.'' `Bitter Alphabet Soup' Financial institutions have reported losses of more than $70 billion on securities linked to U.S. subprime mortgages this year. Morgan Stanley announced a steeper-than-forecast $3.56 billion fourth-quarter loss today after $9.4 billion of writedowns on mortgage-related holdings. TOBs and variable rate demand obligations, or VRDOs, sold by U.S. states and cities, compete for the same investors and make up about 16 percent of the $2.6 trillion municipal debt market, CreditSights said. While TOBs and VRDOs may not ``make or break financial markets or the U.S. economy'' they are ``yet another ingredient in the bitter alphabet soup of structured finance,'' the CreditSights report said. bloomberg.com