Downgrading spells trouble for muni bonds
Just as governments across the nation are facing declining revenues and increasing demands for services and infrastructure improvements, one of their major sources of revenue may be in jeopardy.
On Jan. 30, Fitch Ratings lowered the credit rating of the FGIC Corporation. Financial Guaranty Insurance Company, also known as FGIC, is one of the leading insurers of municipal bonds. Its rating downgrade from “AAA” to “AA” is important because it could mean downgrades for the more than 114,800 municipal bonds FGIC now insures, making these bonds less desirable for Wall Street firms to issue and for investors to purchase.
County officials are familiar with bond ratings. Ratings of a government’s ability to retire its debt can vary from the prized “AAA” to “B” to the dreaded “CCC.” Bragging rights abound when Moody’s or Standard & Poor’s gives a high rating to a county for its creditworthiness.
Subsequently, when Wall Street firms issue municipal bonds, they do so based on the ratings from the top rating agencies. And, just to make certain the bonds carry a minimum of risk to them or the investor, they also insure these bonds with the top insurance firms.
It’s in this second part of the process that the FGIC downgrade has its impact. As an insurer of more than $314 billion in bonds overall, FGIC must have sufficient capital to minimize the risk to the issuing firms. Fitch downgraded FGIC because the company, which saw its capital shrink as its investments in the sub-prime mortgage market went sour, did not have the current capital required to maintain this top rating.
Bonds now insured by FGIC are less secure because the insurer backing them has itself become a credit risk.
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