Ambac Downgraded, Cities Seen at Risk
Saturday, 19. January 2008, 03:53:35
Stephen Bernard and Leslie Wines, of the Associated Press write, after the markets close that the downgrade of bond insurer Ambac Financial by Fitch, is likely to have far-reaching effects, making it more difficult for cities to issue new bonds; and forcing further write-downs at financial services companies.
The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.
Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.
Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC.
"Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.
But while downgrades threaten to send financial services firms further into a tailspin, it will also create huge problems for municipalities.
Prior to Ambac's downgrade, T.J. Marta, a fixed-income analyst at RBC Capital Markets, said a downgrade of the company would lead to downgrades of all the municipal bonds it insured. Subsequently, it will become more difficult for cities, counties and other local entities to issue debt for building projects, Marta said.
Several types of municipal issuers will be most vulnerable if they can no longer secure insurance. These are borrowers like small private schools and hospitals that are not backed by a regular tax base or revenue stream. Typically, these entities have had to secure insurance to gain credibility with the public and sell their debt.
At the very minimum the troubles of the insurers will drive up borrowing costs of cities and other local entities at a time when many are strained by weaker tax revenue, said John Atkins, a fixed-income analyst at IDEAGlobal.com.
The failures of some bond insurers could open the door for those who do not get downgraded, as municipalities look to minimize borrowing costs.
Late Friday, Fitch also downgraded 420 classes of asset-backed securities transactions supported by a financial guaranty policy provided by a subsidiary of Ambac.
Some having seen the fall in AMBAC two days ago sold it short and got an immediate reward; others went long is SKF and got a 6.71% payback today.
December 24, 2007 was truly a defining and landmark day in investment history as seen in the sharp upswing of the 200% Russell 2000 Inverse TWM compared to the Russell 2000 IWM.
The investment application is to Be Invested With The Gold ETF, GLD, And To Use Margin Credit To Sell Muni Bonds And The Treasury ETF TLT.
Keywords: *Navaro*
The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.
Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.
Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC.
"Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.
But while downgrades threaten to send financial services firms further into a tailspin, it will also create huge problems for municipalities.
Prior to Ambac's downgrade, T.J. Marta, a fixed-income analyst at RBC Capital Markets, said a downgrade of the company would lead to downgrades of all the municipal bonds it insured. Subsequently, it will become more difficult for cities, counties and other local entities to issue debt for building projects, Marta said.
Several types of municipal issuers will be most vulnerable if they can no longer secure insurance. These are borrowers like small private schools and hospitals that are not backed by a regular tax base or revenue stream. Typically, these entities have had to secure insurance to gain credibility with the public and sell their debt.
At the very minimum the troubles of the insurers will drive up borrowing costs of cities and other local entities at a time when many are strained by weaker tax revenue, said John Atkins, a fixed-income analyst at IDEAGlobal.com.
The failures of some bond insurers could open the door for those who do not get downgraded, as municipalities look to minimize borrowing costs.
Late Friday, Fitch also downgraded 420 classes of asset-backed securities transactions supported by a financial guaranty policy provided by a subsidiary of Ambac.
Some having seen the fall in AMBAC two days ago sold it short and got an immediate reward; others went long is SKF and got a 6.71% payback today.
December 24, 2007 was truly a defining and landmark day in investment history as seen in the sharp upswing of the 200% Russell 2000 Inverse TWM compared to the Russell 2000 IWM.
The investment application is to Be Invested With The Gold ETF, GLD, And To Use Margin Credit To Sell Muni Bonds And The Treasury ETF TLT.
Keywords: *Navaro*
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