|
Ehlers Advisor • March 2008
<br />Ehlers Advisor • March 2008
<br />What's All the Fuss About Bond Insurance?
<br />"here have been numerous stories in the financial news in
<br />recent months about Iiquidity problems and rating
<br />downgrades affecting bond insurance companies.
<br />When municipal bonds are insured, it means that an insurance
<br />company has agreed to guarantee the timely payment of
<br />principal and interest on the bonds. The insurance company
<br />receives a fee for this service, usually paid by either the issuer
<br />of the bonds or the underwriter of the bonds at the time the
<br />bonds are initially sold. The insurance policy results in a
<br />higher rating on the bonds (usually a AAA rating) and
<br />therefore makes the bonds more attractive and marketable
<br />to investors.
<br />Some of the municipal bond insurance companies have also
<br />insured credit derivatives contracts and subprime mortgage -
<br />backed securities. There have been defaults in some of these
<br />derivatives and subprime securities, creating financial pressure
<br />on the insurance companies that insured them. This, in turn,
<br />has caused the rating companies (Moody's, Standard and
<br />Poor's, and Fitch) to downgrade the ratings on some of the
<br />insurance companies.
<br />Impact on Local Governments
<br />It will probably take some period of time before all the
<br />implications of these changes are sorted out. We are
<br />continuing to monitor trends in the markets, and will keep
<br />our clients informed of new developments. For now, we can
<br />summarize the impact in a few key points.
<br />1. You may have an obligation to disclose a downgrade of
<br />the rating on your bonds. All municipal bonds sold since
<br />1995 are subject to the "continuing disclosure"
<br />regulations of the SEC. One of the requirements of those
<br />regulations is the timely notification by the issuer of
<br />certain "material events," including any bond rating
<br />change. If any of your bonds were insured by an
<br />insurance company, and if the rating company that rated
<br />the bonds downgrades their rating for that insurance
<br />company, that is a material event that must be disclosed.
<br />If Ehlers already provides you with continuing disclosure
<br />services, we will file a material events notice on your
<br />behalf if one is required. If you are not an Ehlers
<br />continuing disclosure client, feel free to call us with
<br />questions.
<br />2. If you issued "fixed rate" debt, the payments on your
<br />existing debt will not change. Almost all debt issued by
<br />local governments in Minnesota is fixed rate debt. If you
<br />have any variable rate debt or swaps, your payments
<br />could change; if this happens, feel free to call us to help
<br />determine your exposure and your options.
<br />3. So far, the downgrades of the insurance companies have
<br />not impaired the ability of our clients to issue debt, and
<br />have had very little impact on interest rates or other costs
<br />of issuing debt. There is still strong demand for municipal
<br />bonds, with or without bond insurance. Several stable
<br />insurance companies have maintained their AAA ratings,
<br />and are still selling insurance, and new insurance
<br />companies are emerging (including a new company
<br />created by Warren Buffet and his Berkshire Hathaway
<br />company). It appears that investors are doing more
<br />research on the underlying credit ratings of bond issuers.
<br />This may lead to lower interest rates for highly rated
<br />bond issues, and slightly higher rates on lower rated
<br />issues.
<br />The table below summarizes the current ratings on the bond
<br />insurance companies, as of February 28, 2008.
<br />_du,
<br />ACA Financial Guaranty (ACA)
<br />CCC
<br />Ambac Assurance Corp.
<br />Aaa
<br />AAA
<br />AA
<br />Assured Guaranty Corp.
<br />Aaa
<br />AAA
<br />AAA
<br />CIFG Assurance North America
<br />Aaa
<br />AAA
<br />AAA
<br />Capital Guaranty Insurance Company
<br />Aaa
<br />AM
<br />AAA
<br />Capital Markets Assurance Corp. (CapMAC)
<br />Aaa
<br />AAA
<br />AAA
<br />Financial Guaranty Insurance Company (FGIC
<br />A3
<br />A
<br />AA
<br />Financial Security Assurance Inc. (FSA)
<br />Aaa
<br />AAA
<br />AAA
<br />MBIA Insurance Corp.
<br />Aaa
<br />MA
<br />AAA
<br />Radian Asset Assurance Inc.
<br />Aa3
<br />AA
<br />A+
<br />{
<br />XL Capital Assurance Inc. A3 A
<br />A
<br />*Ratings shown in red above were downgraded since October 2007
<br />Ehlers Ranks in the
<br />NATION'S TOP TEN
<br />as Financial Advisor of
<br />Competitive Sales
<br />Thomson Financial tracks and compiles national
<br />statistics regarding municipal finance debt issues.
<br />The January 3, 2008 issue of The Bond Buyer, "the
<br />daily newspaper of public finance," published the
<br />following list of the top ten financial advisors in the
<br />nation in total principal amount of competitive
<br />issues. Ehlers is No.1 in the number of sales and
<br />No. 8 in total principal volume.
<br />Our growth is a testimony to our continued mission
<br />to serve as an advocate for our government clients in
<br />order to help provide financial solutions at the lowest
<br />cost and the best financing terms possible.
<br />Top Financial Advisors Nationally:
<br />CompetQthie Sales
<br />January 1, 2007 • December 31, 2007
<br />Rank by No. No. of Principal
<br />Financial Advisor of Issues Issues (in millions)
<br />Public Finance
<br />Management Inc. 2 265
<br />9,181.3
<br />Public Resources
<br />Advisory Group 6 41
<br />7,558.9
<br />First Southwest Co. 3 252
<br />4,133.1
<br />Seattle -Northwest
<br />Securities Corp.
<br />7
<br />29
<br />2,490.1
<br />RBC Capital Markets
<br />5
<br />98
<br />2,022.8
<br />Davenport & Co. 8 29 1,656.8
<br />Spri ngsted Inc. 4 190 1,680.4
<br />Ehlers & Associates 1 330 1,413.1
<br />Public FA Inc. 10 3 1,408.2
<br />Montague DeRose
<br />& Assoociates LLC 9 10 1,309.1
<br />Source: Thomson Financial
<br />But we do more than provide debt issuance related
<br />services. The challenges our clients face today are
<br />increasingly more difficult and diverse than those
<br />faced by our clients over fifty years ago. To help
<br />decision makers confidently select the best financial
<br />solutions at the lowest cost for their community, we
<br />have developed a broad array of additional services
<br />related to Financial Planning; Economic
<br />Development, Redevelopment and Housing; as
<br />well as a host of unique Special Services.
<br />le
<br />EHLERS
<br />LEADERS IN PUBLIC FINANCE
<br />www.ehlers-inc.com
<br />MARKET UPDATE: Eiring the Health of the Insurers
<br />By Brian Reilly, Ehlers Financial Advisor, CIPFA, CFA
<br />Global credit markets wrapped up 2007 with quite a bang. Large money center banks
<br />wrote down hundred of billions of dollars in permanent capital, the world's central banks
<br />worked feverishly to inject liquidity into overnight lending markets, and bond insurers saw
<br />their "AAA" preeminence threatened at every turn. The primary culprits in ail of these
<br />instances are real estate
<br />related financial
<br />engineering (mainly
<br />of a sub -prime nature)
<br />and the unwinding of 6.00%
<br />mounds of leverage used
<br />by financial institutions
<br />and investors to gear up
<br />otherwise substandard
<br />investment returns.
<br />The beginning of 4.00%
<br />2008 appears to be
<br />following suit. The
<br />mono -line financial
<br />guarantors (a.k.a. "bond insurers") have seen their stock prices and capital bases
<br />deteriorate due to their involvement in offering insurance against structured fixed -income
<br />products with underlying real estate collateral. The unfolding of the housing bear market
<br />has put their business models al risk, and, concurrently their treasured "AAA" ratings. It is
<br />estimated that roughly 52 percent of total municipal bonds outstanding carry an "AAA"
<br />insured rating. This insurance helps to provide a level of credit enhancement by conveying
<br />the "AAA" rating of the insurance company on the underlying bonds and brings additional
<br />liquidity to an otherwise buy -and -hold market. This gives bond investors the warm -fuzzy
<br />feeling they so love. They know that their principal and interest will be repaid in a timely
<br />manner and that they can trade these bonds based upon market knowledge of the insurer's
<br />credit profile rather than that of Smalltown, USA, population 1,500.
<br />The most troubled bond insurers have witnessed downgrades to "AA" financial
<br />strength ratings by at least one of the three major rating organizations (whose own
<br />credibility has been called into question). This in turn leads to further weakness in the
<br />bonds they insure, and the cycle continues its downward spiral.
<br />There have been a number of insurers that have remained relatively unscathed, and we
<br />have certainly seen underwriting desks flock to them for credit enhancement. The end
<br />result to issuers will likely be higher insurance premiums as the herd is thinned and
<br />slightly higher interest cost for insured bonds until the market feels the bad news has
<br />surfaced. Needless to say, we are likely not quite there yet.
<br />0111111111111111111111111111111
<br />11I I IIIIIIIIIIIII I II I I II IIIIII
<br />11I��,!11II!II!II I I I I II II IIII.
<br />Yields on Municipal Bonds Have
<br />Risen Significantly in Recent Weeks
<br />BOND BUYER INDEX, 2000 TO PRESENT— FEB. 20, 2000
<br />6.50%
<br />5.50%
<br />5.00%
<br />4.50%
<br />00 01 02 03 04 05 06 07 08
<br />NOTE: The Bond Buyer 20 Band Index is a weekly index of average interest rates
<br />on AA -rated municipal bonds maturing in 20 years. Source: The Bard Buyer.
<br />5.11%an
<br />2I2g108
<br />4.03%on
<br />1218N6 - lowest
<br />since 6.57
<br />A Fond Farewell... to a Retiring
<br />Veteran of Public Finance
<br />After almost 32 years in the public finance
<br />advisory business, Jerry Shannon has announced
<br />his retirement. Jerry will be saying goodbye to a
<br />long list of county, city, township, public utility,
<br />and special district relationships he has
<br />established over his career. Communities all over
<br />the Midwest can point to streets, jails, hospitals,
<br />water and sewer systems and other public
<br />projects too numerous to list that Jerry has helped finance over his career.
<br />Ehlers is committed to Roseville, MN Office: 3060 Centre Pointe Drive • Roseville, MN 55113-1105.651-697.8500
<br />designing customs ed financial solutions Brookfield, WI Office: 375 Bishops Way, Suite 225 • Brookfield, WI 53005-6202.262-785-1520
<br />for outstanding communities Lisle, IL Office: 550 Warrenville Road, Suite 220 • Lisle, IL 60532-4311.630-271-3330
<br />• 5 •
<br />• 6 •
<br />
|