Public Finance

Is anyone here in public finance investment banking and do you work with insured variable rate floaters? If so, I have a few questions about the market for liquidity facilities backing these issues right now. Thanks.

I have some experience with them. What are your questions?

With the threat of the various monoline insurers being downgraded, are you seeing pricing on the liquidity facilities increasing? If so, what kind of increases are you seeing? Also, are you seeing different pricing on liquidity facilities based on the insurer of the bonds? I’ve heard that there’s been some issues with the Auction rate market and the remarketing agent’s ability to price the bonds because of the uncertaintly surrounding various insurers. I’m curious if most issuers are abandoning the insured floater market for bank LOC backed issues? Any insight you could provide would be greatly appreciated.

Not sure about the LOC part, but yes insured ARS is having issues right now. Deals are coming with very high yields. Some issuers have simply pulled out and issued l-t debt instead. This is especially true with Radian Asset insured ARSs. Talked with bankers for a Arizona Health Care credit that was planning to do just that in Oct. because there was very little market for Radian-insured ARS. The biggest problem in the muni ARS market is that some investors are confusing what has happened in the ABCP markets and thinking it will happen in the muni market too. There will likely be a return to normalcy once Moody’s releases their final conclusions on the monolines in another week— that is as long as FGIC, Ambac and XLCA get the needed capital infusions.

Isn’t there some concern that housing price drops are going to affect municipal tax pools and thus increase the probability of non-performance (thus raising yields and lowering prices)? That would be separate from the ABS and CP problems, yes?

“municipal tax pools”---- what do you mean?

Thanks, Eddie. I’ve even heard of a few issuers paying additional fees to wrap an existing insured floater with an LOC so they essentially have two guarantees. I guess a 364 day LOC wrap wouldn’t be a bad idea if things do return to normalcy because then they can just choose not to renew the LOC upon expiration.

Cities get a substantial portion of their tax proceeds from property tax, which goes into the “tax pool” of all sources of tax revenue, which are budgeted by the city council and/or manager. If these pools shrink because of property taxes and reduced economic activity (some cities have a sales tax surcharge too), then the funds available to make debt payments are lower.

I thought that’s what you meant. But no, I don’t think that’s been a big factor…yet. It will be in another couple years when those tax revenues begin to fall short. Fitch just said XLCA needs to raise $2 BILLION…good god. Things are going to get worse…