Bond insurers aren't likely to see rating changes as a result of bankruptcies, though some may be refining their practices, Standard & Poor's said.
Large-scale bankruptcies like those in Stockton, Ca., and Detroit are uncommon in the municipal market and defaults won't pose a threat big enough to jeopardize insurers, S&P said in a report Tuesday. Strong capitalization and active participation in bankruptcy proceedings has contributed to the insurers' security.
"We don't currently expect rating migration within the legacy bond insurers' U.S. public finance portfolios or actual defaults that would result in any rating actions on the bond insurers," David Veno, a primary credit analyst at S&P, said in the report.
Guarantors such as Assured Guaranty and MBIA's National Public Finance Guarantee have provided payments on bonds when Detroit defaulted, beginning on Oct. 1. In 2012, 11 of the U.S. public finance issues S&P rates defaulted — a relatively low number, the report said. Assured had a capital adequacy cushion of $450 million to $500 million at the end of 2012, according to S&P, and National had $350 million to $400 million.
"While municipal bankruptcy filings and potential payment defaults may test the bond insurers' capital, we believe they have sufficient capital cushions to withstand the resultant stress and maintain the ratings at the current level," S&P said in the report.
On Tuesday, Moody's Investors Service said its move to put Puerto Rico commonwealth general obligations on review for a downgrade was a credit negative for insurers. If the downgrade were to occur, the island's GO debt would be considered junk and the impact on insurers would be a concern, given their current levels of capitalization, Moody's said.
Total net par outstanding exposure to Puerto Rico bonds by Assured, National, Ambac Assurance Corp., Syncora Guarantee and Financial Guarantee Insurance Corp. was almost $16 billion by June 30, according to an analysis by The Bond Buyer.
Insurers' underwriting policies already reflect changes as a result of high-profile stress in the municipal marketplace, S&P said.
"In our discussions with the bond insurers, they have indicated that when performing credit due diligence, as a first line of defense, they now use additional considerations based on their experience with bankrupt municipalities," Veno wrote.
The guarantors are increasing credit and legal due diligence efforts, including looking at whether a locality has large unfunded pension liabilities or unsustainable municipal growth. Bond insurers may also begin asking for more detailed financial disclosures by municipalities, S&P said in the report.
From a legal perspective, bond insurers may also begin to look at the particular laws on bankruptcy proceedings in each municipality's state, considering whether the state has restrictions on filing or statutory liens that secure bond repayments.
