Municipal Bond Forum

It appears to me that the rating agencies are quite fickle since S&P has made a 180-degree turn and put ACA on negative credit watch with the possibility of a downgrade. ACA just had over a $1 billion write down. In the event of a downgrade below A, it is my understanding that they would have to come up with more than $1 billion in cash. Looking at the stock performance, it is my view that the investing public did not have a great deal of confidence in S&P’s rating view. After all, these are the same rating agencies that rated many Collateralized Debt Obligation (CDO) tranches AAA and have downgraded them several times in a relatively short period of time. Since the issuer pays the rating agency a fee, an inherent conflict of interest seems to exist. Congress and the regulators are just now starting to review this situation, since the public’s confidence in these rating agencies has waned. Beyond quoting S&P’s analysis, what is your internal analyst’s independent view on ACA and what remedies does ACA have now?

B.P., New Jersey

In your article, you mention that rated bonds are relatively safe. My question is, why would FMSbonds choose to underwrite projects in which the bonds were unrated, such as the Anthem Park issue? Can a buyer of such a bond obtain insurance on his own to get some “peace of mind?

J.R.

I’m sure your read the recent Dow Jones article that suggests we are overpaying for insured munis and may actually get a higher yield, with no more risk, on A or better-rated paper that is not insured. The article also advises muni buyers to focus on the underlying rating of an insured bond and avoid them if they are not A rated or better. Most bond brokers never mention the underlying rating unless asked and emphasize that the AAA rating of an insured bond is mostly what matters. How do you feel about this in light of the recent events in the bond insurer arena?

S.F., Connecticut

If Fitch downgrades the bond insurers, how can there not be a large selloff of insured municipals? How do you expect the muni market to react to the bond insurers being downgraded?

C.

With the current illiquidity in the market for ACA insured bonds it seems to me that their ability to write new municipal bond business is going to be severely hampered. I would also assume that any new Collateralized Debt Obligation (CDO) business is dead. How can they survive under these conditions?  Where are the revenues going to come from?

B.P., New Jersey