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Bond Insurer Reconsiders Its Policy on States Lacking Bankruptcy Review

November 28, 2011

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Recent municipal bankruptcy filings have led the nation’s only municipal bond insurer, Assured Guaranty Ltd., to think twice about its policies for states that don’t have any provisions in place for reviewing municipal bankruptcy filings.

Recent municipal bankruptcies in Harrisburg, Pennsylvania, and Jefferson County, Alabama, may be part of a larger trend, some analysts think. Indeed, Vallejo, California, only recently emerged from Chapter 9 bankruptcy, after filing its petition in 2008.

In Pennsylvania, the state may not ultimately permit its capital’s bankruptcy declaration to go through; later this month, a judge will hear arguments both for and against the city’s bankruptcy. Elsewhere in the nation, though, cities can file for bankruptcy without outside review. Such review-free policies, claims Assured, are not conducive to its business practices.

When municipalities are free to discharge or even rearrange debts in bankruptcy, the value of its bonds could plummet significantly, leaving Assured on the hook to pay out. As with other types of insurance, public bond insurance is essentially a bet that the majority of such bonds will perform well and the profits from those high-performing bonds will offset losses from others.

But Assured had significant exposure in to both Harrisburg’s and Jefferson County’s debts. Considering Jefferson County’s is the biggest municipal bankruptcy in the U.S. to date, that could translate to serious losses for Assured.

The insurer’s reaction doesn’t seem to be excessively extreme, given the recent municipal debt climate. In addition to the two well-publicized actual municipal bankruptcy filings in recent months, there have been murmurings about other cities on the brink of bankruptcy or considering bankruptcy down the road.

Just months before Harrisburg’s bankruptcy, yet another municipality (Central Falls, Rhode Island) entered the protection of the bankruptcy court. Indeed, the move toward bankruptcy as a means of easing cities’ debts seems to be more of a trend than a fluke at this point.

As of now, it remains unclear what specific restrictions Assured will put on its insurance process, or what criteria it will use to determine when to offer municipal bond insurance, if it chooses to take that route at all.


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