Bond insurer’s downgraded, what need we do?
From the May 2008 Edition .
David Tanner, Trustee – Village of East Williston Given the large fluctuations in the stock market these days I think we all are paying closer attention to the financial news we hear. One situation that does affect our local governments is the recent credit rating downgrades of several municipal bond insurers by the major credit rating agencies. While these actions do not affect underlying credit ratings, that is, the rating we as a Village may receive, they do affect the credit rating of our bonds, if insured by one of these downgraded insurers. Bond insurance is a guarantee by a bond insurance company to pay the timely principal and interest on a government’s bonds, should the government be unable to make payment. Insurance essentially raises the credit rating of bonds to a triple “A” (Moody’s rating “Aaa”) through the backing of a tremendously liquid financial position bond insurance companies hold. It is a system which benefits everyone. The bond insurer earns a premium, the underwriter is able to sell the bonds at a higher price and the issuer is charged a lower borrowing rate. It is also a system which proved itself some years ago when hurricane Katrina devastated New Orleans and parts of Mississippi. Those municipal issuers whose bonds were insured and due to the displacement of its residents were no longer receiving ample tax or fee revenue to pay debt service on its bonds, had the timely payment of its debt service rendered by bond insurers. So what are we as bond issuers required to do, should a bond insurer who insured one of our bonds be downgraded? Securities and Exchange Commission Rule 15C2-12 sets forth the regulation outlining the circumstances under which “Notices of Material Events” are to be filed. Some of the triggers which require the filing of a Material Event Notice are (i) principal and interest payment delinquencies, (ii) ratings changes, (iii) release, substitution or sale of property securing the debt issue, and (iv) adverse tax opinions or events affecting the tax-exempt status of the debt issue. Therefore, since the downgrading of a bond insurer causes a rating change to a municipality’s bonds, the municipality must file a Notice of Material Event.