Bond insurers MBIA and Ambac are the latest “AAA” guarantors to lose their gilt-edged ratings.
Moody’s reduced MBIA’s rating to “A2,” while at the same time cutting Ambac Assurance Corporation to “Aa3.” Moody’s also said that the outlook on both companies is negative.
The bond insurance crisis has resulted in numerous rating downgrades for the top bond insurers. Five of seven insurers have lost their “AAA” rating.
These downgrades are a direct result of the insurers straying from their traditional business of insuring municipal bonds, which hardly ever default, to guaranteeing complex derivative securities tied to subprime mortgages.
Fortunately for bond investors, the underlying quality of municipal bonds remains strong, despite the continuing downward rating spiral of the major bond insurers. For the most part, these former top-rated companies only insured bonds of investment-grade quality, which can be expected to meet debt service commitments on their own. Ironically, the insurance companies’ woes are not related to the quality of their municipal portfolios, which continue to perform admirably.
In the end, the combination of subprime exposure and the prospects of reduced new business from municipalities who are spurning bond insurance, was sufficient to bring down the top ratings that firms like MBIA, Ambac, and FGIC had enjoyed for decades.
Bondholders’ Outlook
For holders of insured bonds, the impact of continuing insurer downgrades will have a negligible effect on receipt of principal and interest for two major reasons.
First, bond insurance has typically been purchased by high-quality issuers as a means of lowering interest costs.
Second, although the bond insurers have seen substantial downgrades, their ratings remain, for the most part, investment-grade, indicating that their claims-paying ability remains intact.
At FMSbonds, we have always emphasized the fact that we own the bonds we sell. Because of this, our research department, under the auspices of Jay H. Abrams, Ph.D., our chief municipal credit analyst, reviews the underlying credit quality of all bond issues we recommend, whether insured or not. If a material change in a bond’s credit quality occurs, it is our responsibility to offer a course of action to our clients.
We have found in times of uncertainty, independent research capability can provide a strong safeguard of bondholders’ interests.
We are pleased to offer our assistance to any municipal bondholders who would like to know more about the underlying credit quality of their bonds.