Wednesday, December 19, 2007

S&P downgrades major bond insurer, warns four others

In a move somewhat feared in recent financial "trash talk" websites, Standard & Poor's today downgraded the rating of ACA Financial Guaranty Corporation from A to CCC, junk status. I had discussed this problem with respect to three other insurers and Fitch on Nov. 26 on this blog.

S&P also placed warnings on four other bond insurers: FGIC, MBIA Insurance, Ambac, and XL Capital. (Some of these were discussed Nov 26.) The warnings relate to a probability that their ratings could be downgraded during the next several months.

The AP story by Stephen Bernard is titled "S&P Downgrades ACA to Junk Status" and has this link on Yahoo! The story appeared on Yahoo! at 5:39 PM ET and it is not clear whether this affected any municipal bond funds today. In my own portfolio, there was little change. The AP link is here and has the same time stamp. ACA Capital Holdings actually went up today. CNBC's story seems to suggest that this was known to traders during the day.

The New York Times
story is by Vikas Bajaj, is "Bond Insurer Cut to Junk; Negative Outlook for 4 More", link here. On Dec. 19, Bajaj had written an earlier story, "Banks Study Bailing Out Bond Insurer" about ACA Capital Holdings, suggesting that this problem was well known. Bajaj's stories suggest that actual losses and defaults would be avoided if ACA raises capital in the next month or so. However, the WSJ (below) reports that these talks will be called off because of the Dec. 19 downgrade.

Municipal bonds insured by ACA would effectively be uninsured, and some older bonds could be called in, according to many reports.

The Examiner (which runs a group of "free" daily newspapers in many areas) is reporting that S&P cut ratings on many individual municipal bonds, also. This can make it harder for cities to finance public works and schools without directly raising taxes (especially as property value assessments go down). On P 21 of the DC Examiner a report from Stephen Bernard in New York reads "Downgrading of ACA Financial to 'junk' could cost banks, local governments billion. David Royse of the AP has a report in the Examiner "Florida bonds affected by S&P downgrade of bond insurer ACAFlorida bonds affected by S&P downgrade of bond insurer ACA", here.

The Wall Street Journal story is on p C1 Dec. 20. by Serena Ng, "Key Downgrade Adds New Layer To The Crunch: A Bond Insurer Is Cut To Junk, and the Street May Get Pinched, Too, link here (may require subscription to see all content). The tone of the article is quite negative.

CNBC, early on Dec. 20, was reporting sharply lower bids for MBIA and Ambac, and expressed concerns about their holdings and exposure. CNBC provided verbal discussion of CDO 's, with the impression that the illusion of safety for muni's can have catastrophic repercussions when there is a downgrade. Even so, the mainstream media has not paid much attention to this whole matter.

The website for ACA seems to be this, and does not appear to have any info on today's announcement yet. You can watch their ratings page here (not updated as of early 12/20) and the latest press release was 12/13, a non-compliance notice from the NYSE.

Standard & Poor's web listing of bond insurers is here.
ACA is marked "CCC/Watch Dev/" and some other bond insurers are marked "AAA/Negative/". S&P discusses bond insurance ratings at this link.

This is all important to me personally because of the stability of my portfolio, but I can't see specifically what is really happening yet, as there is still a lot of speculation. The mortgage defaults are likely to continue (despite Bush's earlier action) because so many borrowers had tried to "get something for nothing," always a sign of trouble.

A good blog for some technical discussion is Sirtuininvestor, here.

Update: Dec. 29, 2007

Warren Buffet and Berkshire Hathaway are apparently going to try to help bail out the bond insurers (at least for the municipal market). The Washington Post story in the Business Section p D01 Dec. 29, 2007 is "Struggling Bond Insurers Get New Rival: Warren Buffett" by Tomoeh Murakami Tse, link here. How helpful this will be remains to be seen and will be taken up later.

Update: 12/31/2007

Floyd Norris has a complicated discussion of whether this could spread to corporate bonds in the Business Day New York Times, Friday Dec. 28, 2007, p C1, "High & Low Finance: Credit Crisis? Just Wait for a Replay" here. This gets more into MBA territory.

1 comment:

Sirtuin Investor said...

Municipal bonds that used ACA as a backstop credit, meaning they were independently rated, drop to their stand alone rating. This makes perfect sense. What does not make sense is what happens to a bond that has no stand alone credit rating. In this case, the S&P rating drops to CCC which indicates low grade junk. This is misleading as almost all of these municipals would be investment grade if they were rated by a rating agency as they are not likely to default. It would be more accurate for the ACA insured municipals to be shown as "unrated".

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