Sell Side

Dexia, BoA, JPM Lead LOC Ranks

SAN FRANCISCO - Dexia Group, Bank of America, and JPMorgan Chase dominated the letter of credit and standby bond purchase agreement markets in the first nine months of this year, providing nearly half of the liquidity for variable-rate bonds sold in the first half of the year, according to the latest league tables from Thomson Reuters.

They all get the same prize: a handful of bank bonds.

Municipal bond issuers primarily use letters of credit and standby bond purchase agreements to provide liquidity in case they fail to find new buyers for variable-rate debt that must be remarketed weekly. The credit crisis has diminished the market for that debt, forcing municipalities across the nation to tap lines of credit in unison, just as banks face funding crises of their own.

Market participants say the penalty rates munis pay on the debt aren't likely to tempt banks to make such commitments again soon.

"It's basically a frozen market," said Jean Marie Buckley, president of Tamalpais Advisors Inc. and financial adviser to major public agencies like the Los Angeles Unified School District. "With all of the massive put activity and tender activity going on, those banks are having to fund those positions, and in some cases, what they're earning on the bank bonds isn't covering their cost to fund them."

While there's no clear data on how much muni debt the banks have had to take on their books, at least a couple of banks, Dexia and Depfa Bank PLC, have cited the funding pressures from muni bank bonds in recent days. Municipal issuers report that they're seeing hundreds of millions in variable-rate debt put back to banks.

The top three liquidity providers thus far look like survivors in the banking industry shakeup, but even the strong are managing mortgage-related worries and a frozen interbank lending market. Bank of America and JPMorgan Chase are also digesting large acquisitions that required new capital.

Bank of America was the top issuer of muni LOCs in the first three quarters of the year, backing $13.2 billion, according to Thomson Reuters. It was third in SBPAs, providing liquidity for $3.8 billion. It did most of that business in the first half. It provided just $402.1 million of the SBPA total in the third quarter.

BOA last month agreed to acquire Merrill Lynch & Co., as the brokerage giant sought a banking parent, and it raised $10 billion to shore up its capital base. Earlier in the summer, it bought Countrywide Financial, the biggest U.S. mortgage lender. Standard & Poor's cut the bank's long-term counterparty rating to AA-minus from AA last month. The agency put the bank on ratings watch negative last month.

JPMorgan Chase was the number-two LOC and SBPA bank in the first nine months of the year, backing $5.8 billion with LOCs and $5.3 billion with SBPAs. The bank agreed to buy Washington Mutual's retail operations when the nation's biggest thrift collapsed last month. Standard & Poor's put the bank's AA issuer credit rating on credit watch negative in June.

Dexia ranked first among SBPA providers in the first nine months of the year with $7.5 billion of deals. It ranked third in LOCs at $3.9 billion. But like its bigger American rivals, the Franco-Belgian bank has scaled back such commitments as capital became dearer. It issued just $752.7 million of those LOCs in the third quarter, less than a fifth of its total this year. It fell to sixth in the league tables.

Dexia, which is also parent of municipal bond insurer Financial Security Assurance Inc., last week required a government bailout from France, Belgium and Luxembourg. The bank has faced losses in FSA's financial products unit due to U.S. housing market exposure.

FSA was the top insurer in the first three quarters of this year, backing $36.4 billion, as it capitalized on its triple-A credit rating amid declining creditworthiness of most of its competitors. Business slowed dramatically after Moody's Investors Service put the insurer on review for possible downgrade in July. FSA insured $4 billion in the third quarter, dropping to second a league table that dwindled to just three players.

Standard & Poor's and Fitch Ratings last week put the ratings on negative watch because it's unclear what the government bailout will mean for the bond insurance business.

Moody's also put Assured Guaranty, the top ranked insurer in the third-quarter, on review for possible downgrade in July. The company has insured $20.5 billion in the first nine months of the year, placing second to FSA, and $4.2 billion in the last three months, topping FSA in the third quarter.

Berkshire Hathaway Assurance, Warren Buffett's new bond insurer, placed third in the league table, but its totals remain small with $1.7 billion in 13 insured deals thus far this year.

"There's little value in bond insurance, so people are going to market on their own," said Peter Miller, a managing director at Public Financial Management Inc., the top ranked financial adviser so far this year. "We're advising clients that unless they absolutely have to be in the market to stay away."

Miller and lawyers such as Roger Davis -head of the public finance group at Orrick Herrington & Sutcliffe LLP, the nation's most active bond counsel in the first nine months with $35.7 billion of transactions - say issuer clients are seeking more advice than usual as they prepare to restructure debt that's not performing well and ready deals that can't be delayed.

"Many deals are being postponed or going on the shelf temporarily until greater confidence or understanding of the market can be achieved," said Davis. "On the other hand, we were busier in the second and third quarter of this year than probably we've ever been."


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