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Municipal debt sales this week by Arizona and Chicago show demand for bond insurance persists, even after the percentage of the market to carry such guarantees plummeted to below 10 percent last year.
Arizona, the state with the largest mid-year deficit relative to the size of its budget, sold $709 million of debt insured by Assured Guaranty Municipal Corp. yesterday. About $316 million of the general obligation bonds that Chicago, the third-largest U.S. city, offered also will be backed by the unit of Bermuda-based Assured Guaranty Ltd., formerly known as Financial Security Assurance Inc.
Assured is "the only group currently writing substantial new business" on state and local government debt issues, Moody’s Investors Service said last week. Less than 9 percent of the municipal securities sold last year were insured, according to BofA Merrill Lynch Global Research. The mortgage crisis devastated bond insurers, which together guaranteed more than 45 percent of the market as recently as 2007.
"Insured volume will remain at a reduced steady state," John Hallacy, a municipal strategist at Bank of America Merrill Lynch in New York, said in a report Jan. 8. "The wild card" is whether new financial guarantors can enter the business.
Bond insurance from Assured Guaranty Municipal is rated AAA by Standard & Poor’s, Aa3 by Moody’s and AA by Fitch Ratings. All three companies have negative outlooks on the credit, indicating potential for reductions.
Soaring foreclosures
Seven bond insurers, led by units of MBIA Inc. and Ambac Financial Group Inc., once carried top ratings before mortgage foreclosures soared and their creditworthiness suffered.
Arizona sold 10-year debt at a 4.33 percent yield, 133 basis points more than an index of top-rated municipals compiled by Concord, Massachusetts-based Municipal Market Advisors. A basis point is 0.01 percentage point. The research firm’s 10- year index was unchanged yesterday at 3.1 percent.
The deal in Arizona raises cash for operating expenses to help plug a gap projected last month at 20.5 percent of the state’s fiscal-year budget, based on data from the Washington- based Center on Budget and Policy Priorities.
On their own, Arizona’s securities, backed by state appropriations, are rated A+ by S&P and A2 by Moody’s, four and two levels lower than the insured ratings, respectively. Underwriters led by Morgan Stanley handled the state’s sale.
Chicago, which trails only New York and Los Angeles in population, bought insurance for tax-exempt bonds due from 2025 through 2030 in yesterday’s offering, preliminary data compiled by Bloomberg show.
Underlying ratings
The city’s underlying municipal ratings are the same as the insurer from Moody’s and Fitch, and three grades lower at AA- from S&P. Twenty-year securities with an interest rate of 5 percent were priced to yield 4.41 percent, 41 basis points more than Municipal Market Advisors’ comparable index.
Chicago offered a total of almost $800 million of bonds through banks led by Siebert Brandford Shank & Co., including Build America and Recovery Zone Economic Development bonds, which are taxable and have federally subsidized interest.
Following are descriptions of pending sales of municipal bonds in the U.S.
SAN DIEGO COUNTY WATER AUTHORITY, a wholesale water provider for 3 million people in southern California, plans to sell $537 million of taxable, federally subsidized Build America Bonds and $102 million of tax-exempt securities. A group of banks led by Citigroup Inc. and Barclays Plc will market the deal to investors as soon as next week to raise money for system improvements. The water revenue bonds are rated AA+ by Standard & Poor’s, AA by Fitch Ratings and Aa3 by Moody’s Investors Service. (Added Jan. 13)
LOUISIANA’S WOMAN’S HOSPITAL, a nonprofit facility devoted to caring for women and infants in the state capital of Baton Rouge, plans to borrow about $344 million by selling tax-exempt bonds through a state financing arm. The proceeds from the sale, underwritten by BofA Merrill Lynch, will help fund construction of a five-story replacement hospital and a medical office building. Issuer of the debt will be the Louisiana Local Government Environmental Facilities and Community Development Authority. Moody’s rates the debt A3, and S&P assigns its BBB+. (Added Jan. 14)
Jeremy R. Cooke
Source: Bloomberg.com January 2010
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