We warned investors before California's G.O. bond sale in October 2007 to seek more yield relative to other munis, citing our concern that the state's budget deficit could balloon to $10 billion in the wink of an eye. On November 14 the state's independent Legislative Analyst's Office said a soft economy and stagnating housing market could lead to a $2 billion deficit in the current fiscal year and $8 billion in the next fiscal year beginning July 1, 2008.
Since then, the governor has proposed a budget to deal with an even bigger deficit. California has a huge backlog of G.O. bonds and yields are rising as of March 2008 on all municipal debt.
We also expressed concern in November's edition over the possibility the state might create "new" credits that let it lower borrowing costs in the future. Some investors would find these new credits appealing, but there is a downside as well. Subscribe now for our analysis of these issues and others affecting your portfolio.
(June 19) -- Moody's Investors Service downgraded MBIA to A2 from Aaa and cut Ambac to Aa3 from Aaa. Standard & Poor's earlier this month had downgraded MBIA and Ambac to double-A from triple-A and left the bond insurers on a watchlist for more downgrades. This marks the end of these companies' future to generate new business in the muni bond market.
We said in a recent print edition that it would be healthy to purge the municipal market of some of these companies. Muni bonds guaranteed by these two companies should remain sound, despite "paper" losses over the lowered ratings.
(June 6) -- Standard & Poor's lowered the ratings of bond insurers XLCA and CIFG. Growing estimates of potential losses from mortgage-backed securities remain one of the main concerns.
S&P downgraded XLCA to BBB-minus, the lowest investment-grade level. S&P previously rated the insurer A-minus, and at one time XLCA was one of the triple-A financial guarantors before the current debacle unfolded last year.
CIFG was cut to A-minus from A-plus by S&P. Fitch Ratings last month lowered CIFG to CCC from A-minus (CIFG had previously asked Fitch to withdraw its rating, saying the rating agency didn't rate enough of its portfolio to assess accurately its capital needs).
(Mar. 7) -- Fitch lowered bond insurer CIFG Guaranty to AA-minus from AAA and kept the rating under review. A day earlier Moody's Investors Service downgraded CIFG Guaranty to A1 from Aaa and assigned a "stable" outlook.
CIFG's parents took a positive step by injecting $1.5 billion into the company in late 2007. Since then, however, Moody's has concluded the insurer faces even higher mortgage-related risk. In addition, the parents "have recently taken a more guarded posture" about more capital infusions at this time, Moody's said in a release. Fitch also said that CIFG needs more capital.
CIFG has been a smaller player in the municipal market. Nevertheless, the list of insurers who made stupid decisions, and will never, ever, work in the muni market again, just keeps growing. Moody's this week also warned XLCA it might cut that insurer's A3 rating even lower.
(Nov. 14) - Two of the last remaining "older" AAA bond insurers will merge. Assured Guaranty said it will buy Financial Security Assurance (FSA) from parent Dexia. Assuming the pending deal goes through, we assume the combined bond insurers will be stronger going forward. FSA is facing a downgrade warning and Dexia previously set limits on how much more capital it will inject in the company.
The new bond insurer set up by Warren Buffett (Berkshire Hathaway Assurance Corp.) also carries a triple-A rating.
(UPDATE -- Some yields featured below were reduced at institutional pricing thanks to strong demand.)
(Mar. 4) -- Our March print edition once again discusses the State of California's credit and the decisions facing individual investors.
A retail sales period this is closing today for California's $1.75 billion G.O. sale shows how yields have jumped in the muni market and on the state's bonds in particular. (Institutional investors are expected to place orders on Tuesday; because there has been so much demand, retail orders will be limited after Tuesday morning.)
Investors should double-check with their dealers about the prices and yields to get any updates; these are examples we saw as of Monday, March 3.
The Taxable Equivalent Yields will get the attention of some investors after they convert these from tax-exempt rates.
A 5% or 4% coupon bond due in March 2013 yields a tax-exempt 3.85%.
A 5% or 4.5% coupon bond maturing in seven years yields a tax-exempt 4.23%.
A 5% coupon bond due in 2017 yields 4.57%.
A 5% coupon bond maturing in 2019 yields 4.89%.
A 5% coupon bond due in 13 years yields a tax-exempt 5.1%.
A 5.5% coupon bond maturing in 20 years yields 5.55%.
A bond due in 2036 yields 5.625%.
Feb. 20 -- California's legislative analyst said the state's projected deficit through the end of fiscal year 2009 (6/30/09) is $16 billion.
The governor's proposed budget already anticipated addressing a budget gap of about $14 billion in this and the next fiscal year. If the legislative analyst is correct, the state would end fiscal 2009 with less of a reserve than planned. And don't be surprised to see the deficit get even worse in the months to come.
(June 24) -- California sold $1.5 billion of general obligation bonds this week.
We thought the state should have paid higher yield premiums, relative to higher-rated muni bonds, but can understand why investors were happy with 5%+ yields on 19-year maturities and beyond.
Yields were higher than a sale in early April. A 30-year bond yielded 5.30%, up from 4.96% in early April but down from 5.4% in an early March sale. A five-year bond yielded 3.56%, up from 3.33% in early April but down from 3.7% in the state's early March sale.
The early March yields are somewhat deceptive because the municipal market fell apart in late February, with rates soaring temporarily. Rates rose in June over early April, reflecting general market trends.
(Nov. 5 update: Moody's cuts Ambac by four notches to Baa1.)
(Sept. 18) -- Moody's Investors Service said it might downgrade bond insurers MBIA (rated A2) and Ambac (Aa3) yet again because of revised loss projections for subprime mortgage products. Moody's cited the possibility of "multi-notch" downgrades. The revised loss projections also could have implications for where other lower-rated bond insurers end up being rated (and Moody's already is reviewing triple-A insurers FSA and Assured Guaranty). Most of the insured bonds backed by downgraded guarantors already trade based on their "underlying" credit rating and they aren't likely to default in the first place. Moody's said its revised loss assumptions are expected to have a "significant impact" on the insurers' capital positions.
(Feb. 21) -- Bond insurer FGIC was first to propose to a New York regulator that its business be split in two. This plan could segregate municipal bonds from riskier mortgage-backed securities. We are assuming the entity focusing only on muni bonds might be able to pursue a triple-A rating again. MBIA and Ambac also are studying the strategy. If the plan was workable, it would relieve some of the stress on insured muni bonds.
(Oct. 24) -- Assured Guaranty Corp., one of only a handful of AAA bond insurers, has agreed to reinsure about $13 billion of municipal bonds guaranteed by downgraded CIFG N.A. This is a positive step because it gives bondholders added comfort they can count on the bond insurance if needed (most insured municipal bonds never default in the first place). Recently MBIA agreed to reinsure a big chunk of FGIC's municipal bond portfolio. MBIA isn't AAA anymore but is still stronger than FGIC.