California, the largest borrower in the U.S. municipal market, sold $1 billion of general obligation bonds without insurance, joining a growing number of issuers questioning the value of buying such coverage.Well so much for the idea that Ambac (ABK) and MBIA (MBI) will raise rates to dig themselves out of the hole they are in. Given that their "guarantees" are essentially worthless, why should anyone bother with insurance? That seems to be what a number of states have decided.
California joins New York City, Tallahassee and other state and local governments in re-evaluating the benefits of AAA bond insurance -- applied to almost half of all municipal bonds to lift their ratings, ease trading and guard against default. Credit-rating services are reviewing the insurers following their backing of debt linked to defaulted home loans.
"The premium to be realized from bringing a deal insured has widened out enough that a lot of these issuers are just saying, `Let's go uninsured,' if nothing else than just to test the waters," said Evan Rourke, a municipal portfolio manager at M.D. Sass Associates in New York.
A quarter of the $11.1 billion in California general obligation bonds issued so far this year carried policies guaranteeing timely payment of interest and principal from various companies, including MBIA Inc. and FGIC Corp.
Insurance Value
"We are buying a triple-A rating with insurance, and given the current situation, we have to wonder, are we really getting that value?" said Tom Dresslar, Lockyer's spokesman.
Three weeks ago, Tallahassee, Florida's capital, sold $154 million of sewer bonds uninsured, scrapping plans to buy Ambac's backing for the deal. New York City is planning to forgo buying insurance in a $100 million of variable-rate bond offering as soon as next week.
Ambac and and MBIA executives said "they could slow new business or issue debt to meet new ratings agency requirements". See Will Ambac and MBIA Survive? for further discussion.
But it looks like business is slowing already and I doubt that is a good sign for either company. As for issuing debt, who would want it in this environment? If anyone did what would the price be?
Ambac and MBIA as well as financials in general rallied big today as if the bailout proposal by Paulson, the administration and various lenders will accomplish anything. But as I said in "temporary" mortgage freeze is doomed, that bailout plan will have negative benefits and is doomed from the start.
Mike Shedlock / Mish
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