Municipal Bond Forum
On ‘When Bond Insurance Does Matter’
Q
I own some Puerto Rico transportation bonds. When I bought them, they were rated “AAA” because they were insured. Now they are rated Baa3 because the rating on the insurance company is dismal. The bonds still trade near par and the yield is good. What are the risks of holding these bonds?
A
James A. Klotz responds:
The issue you hold is secured by a mix of diverse taxes, toll receipts, and motor vehicle fees, which have a track record of being more than sufficient to meet debt service payments.
For fiscal year 2006, gross pledged revenues produced a strong debt service coverage ratio of 2.04 to 1, according to Standard & Poor’s. S&P has assigned a “BBB+” underlying rating to these bonds.
It is important to note that these bonds were issued in support of an essential public service – highways – that are integral to Puerto Rico’s economy and transportation system.
As to whether you should continue holding these bonds, we can understand your concern that, upon purchase, you had the comfort of knowing they were insured by a “AAA” insurance company. Although the bond insurance is technically still in place (despite the poor prospects of the insurer), the underlying credit continues to perform as expected, and we anticipate it will continue to meet its debt service obligations in the future.
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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.