Dexia Group and its three main operating units were placed on review for downgrade earlier this week by Moody’s Investors Service amid concerns that the bank would need a second bailout by France and Belgium. The first bailout came in 2008 after the lender posted steep losses related to toxic assets, and it continues to struggle with its exposure to Greece and other sovereign credits.
Dexia has cut its exposure to the U.S. muni market to $10 billion in letters of credit and liquidity facilities from over $54 billion at its peak in 2008. The decrease in exposure has come as issuers in the United States have been busy restructuring debt backed by Dexia.
“This is, at worst, a modest negative for the muni sector,” said Matt Fabian, managing director at Municipal Market Advisors. “Issuers need time to finish restructuring away from Dexia. At worst, their bonds will become bank bonds and accelerate the process.”
The biggest downside will be for the bank itself, he said, which has been working on a larger restructuring. “Any puts that happen will worsen their cash crisis,” Fabian said.
“Dexia’s back in the news again and possibly restructuring,” a New York trader said Wednesday morning. “So, anyone familiar with some muni issuance understands that that could affect the short end of the muni curve, as well. There’s a lot of uncertainty out there.”
Dexia was the fourth-largest LOC provider in 2008, a record year for variable-rate debt when volume for such bonds reached $120 billion, according to Thomson Reuters.
But in the wake of the financial meltdown, the bank has been exiting the market. It sold its U.S. bond insurance company, Financial Security Assurance Inc., to Assured Guaranty Ltd. in 2009. Dexia has reduced its exposure to LOCs and liquidity facilities from over $15.3 billion in May of this year to $12 billion in August, to $10.8 billion at the end of September, according to Bank of America Merrill Lynch.
“There have been a lot of conversions to fixed rate and-or substitutions to other LOC providers,” said John Hallacy, director of market research at B of A Merrill. “Issuers also may have been worried about its rating status or there was a possibility they got a better quote from someone else when it came time to renew. Dexia is unwinding.”
Some say Dexia’s bailout by France and Belgium could, in fact, be a plus for bonds involving LOC and liquidity facilities provided by Dexia. The bailout “allows the company to avert further problems,” Hallacy said. “It’s designed to help maintain ratings which, in turn, would benefit LOC holders.”
Indeed, many issuers of the bonds backed by Dexia already have restructured the debt, gradually pushing Dexia out of the U.S. muni space.
In early September, the New York Local Government Assistance Corp. issued $191.2 million of Series 2011A fixed-rate subordinate-lien bonds that refunded variable-rate demand bonds issued in 2008 with a liquidity facility from Dexia.
In August, San Francisco International Airport sold $450 million of refunding bonds to take advantage of low yields, and take out $51 million of variable-rate debt backed by Dexia and terminate interest rate swaps.
Also this summer, New York’s Metropolitan Transportation Authority remarketed $347.7 million of dedicated tax fund variable-rate refunding bonds originally sold in 2008, substituting a standby bond purchase agreement issued by Dexia with credit facilities issued by Morgan Stanley and Bank of Tokyo-Mitsubishi.
Last spring, Denver Public Schools issued $400 million of Series 2011A certificates of participation that refunded $750 million of Series 2008A and 2008B pension COPs that included a standby bond purchase agreement provided by Dexia. The standby bond purchase agreement with Dexia was converted to LOCs provided by JPMorgan, Royal Bank of Canada, and Wells Fargo.