Standard & Poor’s has changed the CreditWatch status of a number of MBIA Insurance Corp.-backed variable-rate demand obligations over the past two weeks as a result of a downgrade to MBIA Insurance.
The action follows MBIA’s restructuring of its insurance subsidiaries to make MBIA Insurance Corp. of Illinois its muni-only insurer.
As with the rest of MBIA’s existing public finance book, MBIA Illinois has taken over the responsibility of insuring the VRDOs. But the standby bond purchase agreements have termination events linked to the credit ratings of MBIA Insurance Corp., which contains the rest of MBIA’s obligations.
Under Standard & Poor’s criteria, a VRDO’s rating is either the higher of the insurer’s or the underlying rating. But the SBPA’s have termination events linked solely to the bond insurer.
Standard & Poor’s last month downgraded MBIA Insurance to BBB-plus from AA, and MBIA Illinois to AA-minus from AA.
As a result of the downgrade, Standard & Poor’s placed 13 MBIA-insured VRDO credits on CreditWatch negative. This week it revised the CreditWatch status of 17 MBIA-insured VRDO credits to developing from positive. The difference between the credits on CreditWatch negative and developing was the underlying ratings, a Standard & Poor’s spokesman said.
There are also another 106 MBIA-insured VRDOs that remain on CreditWatch developing and could be impacted.
The outcome of the CreditWatch status on each obligation will hinge on whether the SBPAs are amended to substitute MBIA Illinois for MBIA Insurance, Standard & Poor’s said. Without action, short-term ratings could be lowered to A-2 on the VRDOs, which would make them ineligible for money-market funds.
“If an SBPA related to the affected VRDOs is amended within the next 60 days to substitute MBIA Insurance Corp. of Illinois for MBIA Insurance Corp., Standard & Poor’s will review the amendments and may take appropriate rating action at that time,” the agency said. “If no amendment is made, at the end of 60 days, Standard & Poor’s expects to lower the short-term rating of the affected VRDOs to A-2. SBPAs are provided by financial institutions to provide liquidity support in case of a failed remarketing of the bonds as a result of optional or mandatory tenders.”
