One way to avoid the vast and growing problems of the world’s leading bond insurers is to avoid them altogether, as US municipal borrowers are demonstrating, reports the FT on Monday.Municipal borrowers in the US are increasingly issuing bonds without seeking guarantees from beleaguered insurers MBIA and Ambac, highlighting the risks of a collapse in their traditional bond insurance business model unless confidence is restored, the FT notes.
So far in January, US municipalities borrowed $8.6bn through new bonds guaranteed by insurers, according to Thomson Financial. This compares to over $31bn of new guaranteed bonds issued in January of 2007.
About 30 per cent of the new bonds this month were guaranteed by FSA, a bond insurer with little exposure to subprime assets which have created losses for MBIA and Ambac and eaten into their capital base.
MBIA and Ambac, two of the biggest bond insurers, with around a 15 per cent market share of guaranteed bonds last year, were only used to guarantee 1.4 per cent and 2 per cent of new bonds, respectively, Thomson Financial said.
The concerns come as ACA, a much smaller bond insurer, was facing insolvency after its ratings were downgraded to the lowest junk level, and the company was subsequently unable to raise nearly $2bn in collateral.
Already, banks have written off billions of dollars related to deals they have done with ACA.
Because bond insurers have typically had top triple-A ratings, being able to offer the security of such a rating has historically allowed municipalities to borrow at a lower rate of interest than if borrowing without guarantees.
Ambac, the world’s second-biggest bond insurer, on Friday lost its crucial triple-A credit rating, further undermining its ability to add new business and dealing a blow to the billions of dollars of securities it has guaranteed.
Ratings agency Fitch cut the insurer’s credit rating to AA, citing a $1bn capital shortfall caused by losses on mortgage-related bonds Ambac has guaranteed.
Fitch did not rule out further downgrades, citing “significant uncertainty with respect to the company’s franchise, business model and strategic direction”.
It’s all looking good for Berkshire Hathaway Assurance Corp, the new bond insurer backed by billionaire investor Warren Buffett, which in coming months is likely to start guaranteeing new bonds for municipal borrowers.
Not so good, though, for the top bond insurers - not least, MBIA and Ambac, after Ambac was forced on Friday to abandon a plan to raise $1bn in new equity capital, and both companies faced the threat of losing their crucial triple-A ratings, reports the FT on Monday.
Moody’s also warned Thursday that MBIA’s triple-A rating could be cut, leading on Friday to a 13 per cent drop in MBIA’s shares. Just the previous week, MBIA raised $1bn of new capital to secure its triple-A rating from Fitch.
Both companies have described the Moody’s action as surprising. In December, the ratings agency affirmed the ratings of both companies with a stable outlook.
The situation has ratcheted up pressure on the ratings agencies to clarify their positions after a series of conflicting signals have drawn fire from bond insurers and their investors.
The prospect of ratings cuts comes as banks and other financial institutions try to untangle losses related to smaller bond insurer ACA, which faces insolvency after it was slashed to the lowest junk rating in December.
Perhaps, then, the most appropriate last word comes from Jack Dorer, managing director at Moody’s, who told the FT on Friday: “We have growing concerns about the potential volatility in the mortgage sector. This is not a static situation.”
