Friday, May 29, 2009
Fitch Withdraws A+ Rating On Waterworks Bonds
Fitch Ratings assigned an A+ rating to two series of bonds the Indianapolis Bond Bank planned to issue earlier this month in the denominations of $51.2 million and $49 million, respectively, for waterworks projects. Fitch withdrew its rating after the Bond Bank decided to postpone the bond sale. Fitch's ratings for $842.5 million in outstanding water company bonds affirmed on April 23, 2009 remains unchanged. Bond ratings for the Indianapolis Water Company's indebtedness have been downgraded over the past year as its financial situation has drastically deteriorated, particularly due to the disproportionate share of variable rate bonds it had issued. The water company is now converting those bonds to long-term fixed rate bonds at a substantial penalty.
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11 comments:
Gary, you might provide a little explanation regarding the weird rating system Fitch and these other rating places use. People probably are going to look at it and think it it was previously an A+ it was as high as it can get. Aren't the top bonds A+++, or do I have the wrong rating system?
AAA is Fitch's highest rated bonds. A+ is an upper medium grade bond.
Will the same bond counsel that got them into this variable rate mess be allowed as bond counsel again?
Of course, Jon.
This is a non-story. Why would Fitch rate bonds that aren't going to be issued? They wouldn't.
Whenever the Bond Bank decides to come back to market, then Fitch will take a look at rating them.
Jon, contrary to popular belief it is NOT bond counsel's job to be the financial advisor on a bond issue. There are firms such as Umbaugh and Lamont Financial that serve in that role. I can tell you that the FA's and Underwriting banks drive the structure of the bond issue much more than the Issuer. I would bet money that the bankers and FA's led the dog on the variable rate deal that is causing all of the issues now.
So what is bond counsel's role? They are there to ensure that the bonds meet all the requirements to be classified as tax-exempt. If the IRS were ever to audit the bonds and determine the deal was not tax-exempt for some reason (for example, spent on non-qualified items), then the entire issue could be deemed taxable. If this happened bond counsel could be liable to bondholders.
One more thing, the big firms in town dominate this work. Baker and Daniels, Barnes and Thornburg (served as bond counsel on Stadium issues), and Ice Miller. Krieg, and Bose play a little, but to a much smaller scale.
Thanks for the explanation Fulpy regarding how bonds work. So the bond counsel handles the tax liability issues and the financial advisors then provide the expertise to select the bonds. Would I be correct in assuming that none of the parties involved in the bonding issues have any finanacial penalties unless proof of malfeasance, malpractice etc?
Fulpy, It was Ice Miller's job as bond counsel to draft a legal agreement that protected the rights of the Bond Bank and the IWC. It seems to me that the insurance agreement signed with Depfa and MBIA apparently had no covenants that the insurers were properly capitalized to insure the transactions or that they would incur penalties if they failed to maintain a marketable credit rating. Once their credit rating deteriorated, their insurance was worthless and cost the water company dearly.
AI, no one in the Municipal industry got what you are asking for from either the bond insurers or the standby bond purchasers (Depfa). This isn't an Indiana thing. It just didn't happen. That's not to say that the questions weren't asked and bi-lateral provisions requested (I'd bet money on the fact the Bond Bank probably was penalized on a downgrade). The insurers and standby bond purchasers refused to give in because of the liability it would impose on them. Given that you'd ask why the Bond Bank went ahead with the deals. My guess is the investment banks were pushing it and the financial advisors were as well. I seriously doubt the risks were fully explained to either the staff or the Board.
Jon, you are correct in that there are probably no parties that can be fined in this case. Ice could face IRS sanctions if they did something wrong in the IRS's eyes (abusive tax transaction type stuff), but that isn't the case here.
Unfortunately this was a case of a AAA rated bond insurer getting greedy and insuring stuff they shouldn't and getting downgraded. Prior to this occurring it was unheard of for an insurer to downgraded. Then with the failure of Lehman Brothers, Depfa was caught out, because they funded all their liabilities with commercial paper. After Lehman failed they couldn't roll over their paper and ended up being bailed out by the german gov't. So the Bond Bank ended up with variable rate bonds insured by a toxic insurer and with a standby bond purchase agreement with a toxic purchaser and with no hope of replacing the purchaser. Smarter municipal bond issuers across the country have found themselves in the same position. This isn't just an Indianapolis thing (ask the State about the FGIC insured auction rate bonds issued for Lucas Oil and how that turned out...).
Extraordinary commissions were paid out in these transactions as I understand it. It may have happened all over the country, but that doesn't mean it wasn't criminal. In Europe, the principal parties are being charged with fraud and having their assets seized by the governmennt. I believe a mayor down in Birmingham has been indicted in connection with these sleazy transactions.
AI, in the European and especially the Birmingham cases, kickbacks and other fraud took place in the transactions. That has not been alleged here. When MBIA and Depfa wouldn't agree to bi-lateral downgrade triggers, the Bond Bank could have went back to their advisors and underwriting banks and said we don't feel comfortable with the risk, let's do a fixed rate issue. they didn't do that. Ignorance/stupidity isn't criminal, unfortunately or our jails would have many more people in them.
The fact that no criminal allegations have been alleged in our fair city provides no comfort to me. The U.S. Attorney's office in Indianapolis hasn't had a major public corruption case in the 20 years I've lived in this city, excluding the current ongoing trial of IMPD officers who were stealing from drug dealers they investigated as Narcs. Does that mean there is no corruption in Indianapolis? Pay to play totally runs this city. The shakedowns of city contractors is so commonplace it never occurs to anyone that there is a possibility decisions are being made to provide the highest possible reward to the professionals advising government without regard to the risk to taxpayers.
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