Friday, December 21, 2007

Pittsburgh Credit Rating and Exposure to MBIA's meltdown

MBIA is the insurer for the 2005 Pittsburgh General Obligations bond series of slightly less than $200 million in bonds. MBIA is in trouble, and this could be a significant problem for city finances as the underlying credit is not good and probably is at risk of being further downgraded. First, let's see what is going on with MBIA via Reuters:

MBIA Inc, the world's largest bond insurer, said it had guaranteed $8.1 billion of the riskiest mortgage securities, imperiling its entire net worth and sending its shares plunging 26 percent.

Basically MBIA looks to be on the hook guaranteeing super junk bonds. The CDOs of CDOs, especially the lower tranches of them, have been consistently getting pennies on face value in recent market trades. $8.1 billion dollars is greater than the entire net worth of MBIA which means the guarantee is junk. Calculated Risk is reporting that Fitch's is looking to downgrade pretty much everything MBIA insured. And this is where Pittsburgh has a problem as the rating agencies tend to be reasonably correlated with each other given some lags.

Via Chris Briem's Great Municipal Document Archive, I've pulled the 2005 and 2006 General Obligation Bond Reports (which I'll be reading tomorrow in full after I finish cleaning the house before the in-laws come --- yeah, I need a life) I excerpted two relevant sections from each cover sheet:



As you can see the underlying creditworthiness of Pittsburgh general obligation bonds are high grade junk in 2005 and 2006. I would wager that the combination of a general economic slowdown, pro-cyclical local and state budget policies, a political impasse within the city, as exemplified over the fight about the parking tax, and continued population bleed-off may put Pittsburgh's rating at risk. If the value of the insurance guarantee is questioned, as right now the MBIA guarantee is being questioned, then the city will have a much more difficult and expensive time accessing debt markets to roll-over the large balloon payments that are scheduled to occur between 2009 and 2011.

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