Municipal Bond Forum
Insurance coverage
Q
I hold some Xenia Rural District Water Bonds 98410ACE3. I live in Florida. The water district is having financial problems. The issue sells for 60% to 70% on a dollar of par. The district is talking about selling itself for 50 percent on a dollar of liabilities. The issue is protected by Assured Guaranty. How will it work if the district is sold for less than $143 million with the insured bonds totaling $85 million? Based on the strength of the insurance company, does the company make up the difference to par with any lost?
A
James A. Klotz responds:
Bond insurance covers the face amount of the bonds.
Typically, in a distressed situation, the issuer will pay the portion of the debt service it can, leaving the remainder to be made up by the bond insurer.
If water rates are raised, or other corrective action is taken, the issuer may be able, once again, to resume full debt service payments.
Insurers also have the option to pay off the entire issue in default. In such cases, they will pay the full face amount of bonds outstanding.
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