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Will Monolines Come Back To Haunt The Market?

28 September 2017 by lberuti

A couple of days ago, Moody’s Investors Service downgraded the rating of the City of Hartford from Caa1 to Caa3, taking the city’s roughly $500mln debt further into junk category. The rating agency commented that its action “reflect(ed) the likelihood of default as early as November and a higher probability of significant bondholder impairment given impending bankruptcy”. FSA (Assured Guaranty Municipal Corp), which insures more than $300mln of the municipality’s debt, consequently said it was open to debt restructuring and willing to extend financial help to prevent the city from filing for bankruptcy. The amounts at stake do not represent a threat to FSA, but the news was a wakeup call to credit investors. The city of Hartford is not an isolated case and many municipalities are facing mounting liabilities. If more were to adopt a more aggressive stance with bondholders, the life of monolines could be about to become much tougher. The market is far for from pricing a catastrophic scenario at the moment. But if FSA’s 5-year risk premium is nowhere near the peak reached in 2009 – on the above Grapple you can see a full history by clicking on the “Max” option in the left end corner -, it has been rising steadily over the last week. Today, it jumped a further 45bps to 184bps.