14 Tennessee bonds affected by major insurer's downgrade - Nashville, Tennessee - Thursday, 12/20/07 - Tennessean.com
Thursday, 12/20/07
BY STEPHEN BERNARD Associated Press
NEW YORK — A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A." S&P cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital.
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Bond insurers had made guarantees on collateralized debt obligations (CDOs) (aka - mortgage backed securities). These bonds created by placing mortgages in trusts then selling the pay outs in the form of a bond to investors have the threat of default hanging over them. Something like a trillion dollars in CDOs have been insured by bond insurance companies. The assets the insurers have to back these payment guaranties are something like $20 billion. The downgrades taking place are due to the lack of assets. The default potential is an impact of the subprime crisis. The structure of these CDOs is such that the risk can't be determined now.
The downside is bond insurers insure governments allowing the insurers credit rating to stand for the government's, permitting it to pay a lower interest rate. The stock market had already priced these uncertainties into insurers share price dropping them. Now the rating agencies are getting nervous and starting to question or in this case actually lower the insurers debt rating.
Local government will need to work on improving their debt ratings because the insurers may not be there to provide a higher bond rating. The market has already raised the yield on insured bonds. More and more bond issuers are not using insurance when issuing new bonds because of this. This decreases the available market for municipal bonds because many investors require a bond to have an A or AA before they will buy it. This also means debt costs tax and rate payers more. Perhaps this will lead to an improvement in municipal financial management since that is what ratings are based on.
