Regulators try to ease selling pressure on muni bonds

Regulators try to ease selling pressure on munis

Insurers can get new ratings on munis backed by downgraded bond insurers

By Alistair Barr, MarketWatch

Last Update: 6:45 PM ET Jun 2, 2008

SAN FRANCISCO (MarketWatch) — Regulators unveiled a plan on Monday that they
hope will relieve pressure on insurance companies to sell municipal bonds backed
by troubled bond insurers.

Several bond insurers, including Security Capital Assurance (SCA), ACA Capital
(ACAH) and CIFG, have lost crucial AAA ratings this year. Investors still worry
that industry leaders Ambac Financial (ABK) and MBIA (MBI) could also lose their
top ratings.

That’s a problem because such downgrades mean muni bonds guaranteed by the
companies are also downgraded. Insurance companies that invest in muni bonds
sometimes have to sell bonds that are downgraded below investment grade.

The National Association of Insurance Commissioners, which represents state
regulators who oversee the industry, said on Monday that if insurance companies
hold muni bonds which have been cut because of the downgrade of a bond insurer,
they will be able to get a new rating from the group’s Securities Valuation
Office, or SVO.

The NAIC is trying to make sure that otherwise-solid muni bonds aren’t downgraded
just because of trouble at the bond insurer that’s guaranteed the securities. The
move means insurance company investors can, in effect, ignore official ratings
from credit rating agencies in specific circumstances.

“Many municipal bond credit ratings are no longer accurate because they are based
on the downgraded rating of the bond insurer, not of the municipal issuer,”
Wisconsin Insurance Commissioner Sean Dilweg, said in a statement. “The SVO has
the tools to fairly rate municipal issuers.”

Starting July 1, insurance company investors can submit muni bonds for credit
rating assessment by the SVO unit, which will come up with a new rating based on
the financial strength of the underlying municipality.

Before this, the unit wasn’t allowed to assign a credit rating higher than the
ones published by official credit rating agencies like Standard & Poor’s (MHP)
and Moody’s Investors Service (MCO).

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