Thursday, December 27, 2007

Pittsburgh Bond Risk Assessment

I've been worried about the turmoil in the bond insurance market as Pittsburgh has massive amounts of debt that it will need to roll over in the reasonably near future. I have spent some time over the Christmas break reading through the 2005 and 2006 bond reports and a little more digging, so when I saw this story at Calculated Risk this morning, I was able to breathe a little easier:

Fitch Ratings on Wednesday said it may cut its ratings on certain residential mortgage-backed securities insured by MBIA Inc, Ambac Assurance Corp, FGIC Corporation and Security Capital Assurance.

Fitch said it may cut 87 MBIA-insured mortgage bonds, 64 Ambac-insured bonds, 35 FGIC-insured bonds and 19 SCA-insured bonds.

Fitch is basically saying that they don't trust the value of the insurance on these bonds, which given what has gone on in the credit markets makes a whole lot of sense. However, when I went through the two most recent general obligation bond reports, the city does not have any clawback mechanisms on the interest rates as confidence building measures for bond holders. The bonds were sold as AAA with insurance and anything that happens after that which impacts the ratings is borne by the new bond holders. That means there is no short term fall-out.

The intermediate term fallout and increased expenses for the city will come when the bonds start to balloon mature in 2009 to 2011 from these two tranches. The city will not have enough cash to pay those maturing bonds off, so they'll have to rollover the debt or at least a significant portion of it. At that point the city's recent slightly improved credit rating of BBB comes into play if the guarantee value of bond insurance is near nil. At that point the city will be paying significantly higher debt service costs.

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