Friday, January 18, 2008

Ambac and Pittsburgh

Fitch Ratings downgraded municipal bond insurance company Ambac from AAA to AA. The downgrade is most likely the first of many downgrades as the value of the Ambac guarantee is becoming extraordinarily questionable.

Credit rating agency Fitch Ratings downgraded bond insurer Ambac Financial Group Inc. to "AA" from "AAA" on Friday, which could force the company to stop writing new insurance....

The rating also remains on negative credit watch for a further downgrade.

The City of Pittsburgh has used AMBAC as a bond insurer for at least the 2002 general obligation debt offering but went to other insurers for the 2005 and 2006 restructurings. If the 2002 offering was structured similiarly to the 2005 and 2006 offerings, this insurance downgrade will not have any immediate impact as those two bond offerings did not have any clawback mechanisms.

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

The 2002 Ambac insured bond issue is similiar to the 2005 and 2006 structures. The most significant difference is that the city's fiscal health was slightly better in 2002 than in later years, so it was able/willing to borrow money over long terms. The balloon payments for this tranche of bonds do not start until 2012 instead of the 2010/2011 for the 2005 issue and 2008 and 2009 for Series A of the 2006 issue. The big chunk of 2006 is in Series B where the worrying times are after 2013.

With the municipal bond insurance market significantly weaker and a previous relationship now valueless, Pittsburgh has some breathing room in 2008 and 2009, but will need to issue a large refinancing/rollover bond by late 2010.

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