Municipal Bond Forum
Ambac’s future
Q
What would happen to the bonds if a bond insurer, such as Ambac, had its rating cut to junk status or declared bankruptcy? Why should a municipality continue to pay premiums for bond insurance coverage if the bond insurer is bankrupt? Thanks for any light you can shed on bankrupt insurers and the future of the muni bonds they insure.
A
James A. Klotz responds:
Ambac’s current ratings are “Baa1” and “A” by Moody’s and Standard & Poor’s, respectively. Both ratings indicate Ambac’s financial strength is of investment grade quality, indicating sufficient capital to meet any claims that may be filed for payment. While recent trends have been negative for many bond insurers, none have reached the point of bankruptcy. Ambac is seeking to develop plans, similar to MBIA, in which it could isolate its public finance business from exposures to sub-prime real estate. State insurance regulators have been working with the bond insurers to keep them sufficiently capitalized to meet future claims. Ambac, as a former “AAA”-rated insurer, has a very strong credit quality book of insured municipal bond business. If its strategy is successful, we do not anticipate a high level of claims from its public finance portfolio.
As far as bond premiums are concerned, these are generally paid upfront at the time of bond issuance for a policy that lasts the life of a bond issue.
Finally, even if Ambac were to disappear, the muni bonds it has insured are of very strong investment grade quality and would be expected to retain their underlying strength. Very few bonds insured by Ambac or MBIA have ever drawn on the bond insurance and we expect that track record to continue.
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