Concern over Puerto Rico's debt distress has widened five-year credit default swap spreads for bond insurers Assured Guaranty and MBIA's National Public Finance Guarantee, Fitch Solutions said.
"We interpret the CDS widening as a signal that the market is pricing in increasing risk for these issuers by charging a higher premium for credit protection on their debt," Diana Allmendinger, director of CDS Pricing & Analytics at Fitch Solutions said.
Five-year CDS on Assured and MBIA have priced at 66% and 73% wider spreads, respectively, since June 23, according to the latest CDS case study from Fitch Solutions.
`The average CDS spread movement for North American insurance issuers with adequate liquidity over the same period was 11%.
"We look at the five-year CDS because it's the most liquid but the other tenors have widened as well," Allmendinger said.
"The CDS market has not been a good indicator of Assured Guaranty's substantial underlying financial strength and ... it tends to be very volatile and have its own dynamics," Robert Tucker, head of investor relations and communications at Assured Guaranty said. "Our CDS has actually come in significantly - almost 30% or 155 [basis points], since the beginning of this year - including almost 30 bps yesterday alone."
The CDS are continuing to trade with high levels of liquidity with Assured in the third global percentile and MBIA in the fifth.
"Souring market sentiment for Assured and MBIA is likely attributed to concerns over Puerto Rico's debt, to which both insurers have considerable exposure," Allmendinger said. "A new law enacted by the Puerto Rican government essentially removes government support for the commonwealth's public corporations and allows them to restructure debt, which may at least partially explain the CDS widening for both monolines."
Assured insures 10 different Puerto Rico issuers at a total of $5.34 billion in net par outstanding Puerto Rico debt, the most among the bond insurers.
Of this amount, $2.6 billion is subject to the terms of the act, including $852 million of PREPA bonds and $384 million of PRASA bonds.
"The reality is, AGM's credit default swap seems to have little impact of how our insured paper trades or how cash buyers look at our insured bonds," Tucker said. "This is reflected in the fact that the spread between the 'A' rated 30 year general obligation index and the insured bond index (which represents Assured Guaranty) has actually risen from 7 bps in mid-June to 9 bps today, which represents an increase in the value of our paper relative to uninsured 'A' rated paper."
MBIA holds $4.83 billion of Puerto Rico debt, the second biggest exposure among the bond insurers.
About $2.5 billion of this exposure is subject to the terms of the act, which includes $1.53 billion of PREPA bonds.
MBIA declined to comment on the movement of the CDS spread, citing company policy..
Municipal bond yields strengthened on Thursday, after the Federal Open Market Committee meeting minutes released Wednesday afternoon showed the Federal Reserve's tapering is likely to be completed in October rather than in December.
There had been some question as to whether the Fed would end by cutting $15 billion in October or cut $10 billion in October and the final $5 billion in December.
Yields fell by one basis point for bonds maturing in seven years and two basis points for bonds maturing in eight to 30 years, according to Municipal Market Data's triple-A scale.
Accoding to Municipal Market Advisors, the 10-year yield fell two basis points to 2.35% and the 30-year by one basis point to 3.51%. The two year held steady at 0.32%.
In the competitive market, the Massachusetts School Building Authority auctioned $300 million of bond anticipation notes on Thursday.
Bank of America Merrill Lynch won $150 million with a 5% coupon and a 0.09% yield.
JPMorgan won part of the deal with a 1% coupon and a 0.1% yield, Bloomberg reported. Further details weren't available.
The deal is rated MIG1 by Moody's, SP-1-plus by S&P and F1-plus by Fitch.
"That deal will be bought up quickly, especially since there is not much to look at this week, it will come at pretty tight spreads," a trader in the Midwest said Wednesday.
Morgan Stanley is priced $240.2 million of Louisiana gasoline and fuel tax revenue refunding bonds on Thursday.
Yields ranged from 0.71% yield with a 4% coupon in 2017 to 3.64% with a 5% coupon in 2039.
The deal is callable at par in 2024 and is rated Aa1 by Moody's and AA by Standard & Poor's.
The District of Columbia Water and Sewer Authority issued $300 million of taxable fixed rate green bonds with a 100-year final maturity.
"Since this was a taxable deal, the pricing process is similar to that for BABs," Mark Kim, cfo of DC Water, wrote in an email. "We 'priced' the deal about 30 minutes ago with a credit spread of +145 basis points to the 30-year treasury."
The bonds were originally expected to price next week.
"We had favorable market conditions and strong investor interest in our century bond, and so we made the decision this morning to take risk off the table and to accelerate our pricing," Kim wrote.
The underwriters for the century bonds are Goldman, Sachs & Co. and Barclays.
