Denver Direct: Those Pesky Bonds

Sunday, February 10, 2008

Those Pesky Bonds

Raging Bear Market

I wonder what is going to happen to the Bond Issue just passed by the Denver voters to finance some $550 million in “Better Denver” building and maintainance bonds. You may recall I questioned Denver’s ability to sell these bonds into a collapsing market.

I see we now have a Bond Czar to take care of it for us.

In a related announcement, Hickenlooper named Don Hunt director of the Better Denver bond program. Hunt, former chief executive officer of national, Denver-based engineering firm BRW Inc., now leads The Antero Co., a real estate ownership and advisory firm. He served as chair of the Transportation Subcommittee of the City’s Infrastructure Priorities Task Force.

During implementation of the bond program, Hunt will chair the Better Denver Executive Committee, which will develop program policy and manage performance and accountability.

“Don’s expertise, experience and involvement in the Better Denver process equips him well to serve as our “Bond Czar,” Hickenlooper said. “He will be a tremendous asset as we enter the implementation phase of Better Denver.”

“I am pleased to join with Mayor Hickenlooper and the City-CH2M HILL team that will implement this ambitious and impressive bond program for Denver residents,” Hunt said.

I wonder how he’s going to do that into this market:

…This week, Fitch Ratings announced that it will (probably) cut ratings on the 5 main bond insurers (Ambac, MBIA, FGIC, CIFG,SCA) “regardless of their capital levels”.

This seemingly innocuous statement has roiled markets and put Wall Street in a panic. If the bond insurers lose their AAA rating (on an estimated $2.4 trillion of bonds) then the banks could lose another $70 billion in downgraded assets. That would increase their losses from the credit crunch–which began in August 2007—to $200 billion with no end in sight. It would also impair their ability to issue loans to even credit worthy customers which will further dampen growth in the larger economy.

Structured investments have been the banks’ “cash cow” for nearly a decade, but, suddenly, the trend has shifted into reverse. Revenue streams have dried up and capital is being destroyed at an accelerating pace. The $2 trillion market for collateralized debt obligations (CDOs) is virtually frozen leaving horrendous debts that will have to be written-down leaving the banks’ either deeply scarred or insolvent. It’s a mess.

Good luck with all that, Mr. Hunt.

Update added: 2/13/08

Debt crisis spreads to U.S. municipalities
08:16PM ET Wednesday, February 13, 2008.

By Aline van Duyn and Michael Mackenzie – Financial Times

A collapse in confidence in a $330 billion corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs.

The implosion of the so-called auction-rate securities market is the latest incarnation of the credit crisis.

The market, heavily used by municipal borrowers and backed by triple-A rated guarantees from bond insurers, including Ambac and MBIA, was used as a safe place for investors to park cash and earn slightly higher returns.

Its slump this week has pushed interest rates as high as 20 per cent for bodies such as the Port Authority of New York & New Jersey and a Minneapolis hospital.

“The auction securities market is falling apart,” said David Cooke, chief financial officer at Park Nicollet Heath Services in Minneapolis.

Municipal borrowers are scrambling to seek letters of credit from banks and other new sources of finance, but anxiety in the credit markets and uncertainty about the stability of bond insurers is making this difficult.

The sector has grown in recent years, along the same lines as the structured investment vehicle and asset-backed commercial paper markets. Fears that bond insurers will not be able to maintain their triple-A ratings due to exposure to risky mortgage-backed securities have led numerous investors pulling out of the market in recent months.

Banks acting as dealers in the market have been propping up the sector but many of these have pulled back this week amid a realisation that it may not be possible to restore confidence and attract investors back.

“Dealers who would normally pick up a slump are not doing so because their balance sheets are full,” said Jon Schotz, chief investment officer with Saybrook Capital.

The importance of bond insurers to municipal borrowers is one reason regulators are pushing banks to provide capital or credit lines so that bond insurers can retain triple-A ratings.