Thursday, December 13, 2007

More on Pittsburgh Municipal Bonds

I'm following up last week's post on the potential problem for the city of Pittsburgh and its mounds of debt. The city has a mediocre prime credit raiting and routinely uses bond insurance to improve its net interest rate and lower the total cost of borrowing money. In the last post I implied that FGIC is the primary insurer of a significant portion of the city's debt. However Chris Briem at Null Space actually hosts the city's bond agreements and offerings, and MBIA insured a massive 2005 bond issue.

As stated in that post, MBIA looks to be in trouble, and the bond insurance sector as a whole looks to be in significant trouble. Calculated Risk is posting this Bloomberg article on a potentially significant ratings downgrader for a major bond insurer:
Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings, the first top-ranked bond insurer put on notice since the industry came under scrutiny last month because of rising defaults on subprime mortgages that back securities they guaranteed....Security Capital is among seven AAA rated bond insurers that being reviewed by Moody's Investors Service, Standard & Poor's and Fitch for the past month after declines in the credit quality of the securities they guarantee. A loss of its top ranking would wipe out XL's main business of using its AAA rating to guarantee $154.2 billion of debt....
MBIA this week raised $1 billion in a sale of stock to Warburg Pincus LLC to help avert a downgrade
Security Capital is not, as far as I know, an insurer of Pittsburgh debt, but its problems of insuring asset and collatoral backed debt obligations that were rated as AAA but are now either in junk status or worthless is a common problem throughout the entire bond insurance universe. This could be a significant problem for Pittsburgh especially as the 2005 bond issue has significant balloon payments due in the next three years that will require the city to issue roll-over debt at probably higher interest rates.

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