MBIA, Ambac Assist Issuers Struggling With Insured Debt

Apr.09, 2008 in Market Outlook

NEW YORK (Dow Jones)–The nation’s top two bond insurers - and among the most
toxic in investors’ eyes - are working with the issuers whose short-term bonds
they guaranteed to convert the securities into more palatable forms.

MBIA Inc. (MBI) said it has helped convert more than $1 billion in variable-rate
securities into long-term fixed rate bonds. In addition, it is working on turning
auction-rate securities into variable-rate securities, the firm said in a
statement Tuesday.

Ambac Financial Group Inc. (ABK) also said Tuesday it’s providing assistance to
clients trying to convert both auction-rate and variable-rate securities. The
insurer didn’t say in its release how many issuers are involved or how much in
notes has been converted. A spokeswoman didn’t immediately return a call for
comment Wednesday.

MBIA and Ambac said their insurance policies remain on the converted securities.

The auction-rate securities market and the variable-rate securities market, which
are two distinct kinds of adjustable-rate markets, both have been thrown in
turmoil in recent months. Concerns spread as bond insurers exposed to bad
subprime investments faced ratings downgrades, and as liquidity problems hit
leveraged players.

As a result, issuers of debt insured from most of the bond insurers have been
forced to pay higher rates.

The impact of MBIA and Ambac’s efforts hasn’t yet been seen in the marketplace,
said Gary Pollack, head of fixed-income trading and research at Deutsche Bank
Private Wealth Management. He noted that 65% to 70% of auctions for auction-rate
securities continue to fail.

An insured auction-rate security needs an additional form of credit enhancement
such as a bank letter of credit or a standby purchase agreement to be converted
into a variable-rate demand note. Pollack said the insurer on the bond will still
remain a factor for investors deciding if they should purchase a converted
security.

“An investor should look at the issuer, the liquidity provider, and lastly, the
insurer,” he said.

MBIA and Ambac have retained their top triple-A ratings from Moody’s Investors
Service and Standard & Poor’s, but the uncertainty around their ratings has led
to investor mistrust.

Worse off are Financial Guaranty Insurance Co. and Security Capital Assurance
(SCA), which have been stripped of their top ratings. Meanwhile, Financial
Security Assurance and Assured Guaranty (AGO), whose triple-A ratings have been
affirmed with stable outlooks, have steadily increased their market share in new
municipal debt.

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