unprecedented 90,000 municipal securities may be downgraded(ZT)

Moody's warning ripples through municipal bond market
An unprecedented 90,000 municipal securities may be downgraded, UBS says
By Alistair Barr, MarketWatch
Last update: 6:07 p.m. EST Dec. 17, 2007

SANFRANCISCO (MarketWatch) -- Recent rating actions on bond insurers byMoody's Investors Service are having an unprecedented effect on themunicipal bond market, experts said on Monday.

Moody's put thetriple-A ratings of Financial Guaranty Insurance Co. (FGIC) and XLCapital Assurance, a unit of Security Capital (SCAsecurity capitalassurance com
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SCA) , on reviewfor possible downgrade late Friday after re-evaluating the companies'exposure to potential subprime mortgage losses. See full story.
Byissuing warnings on FGIC and XL Capital Assurance, the agency is alsoputting more than 90,000 securities that the companies had guaranteedon review for a possible downgrade, according to global fixed-incomeanalysts at UBS.
The majority of those securities -- 89,709 -- arein the public finance sector, the analysts said, noting that this was"unprecedented" in the municipal bond market.

Bond insurersagree to pay principal and interest when due in a timely manner in theevent of a default. It's a $2.3 trillion business that offers acredit-rating boost to municipalities and other issuers that don't havetriple-A ratings.
But if a bond insurer loses its triple-A rating, the securities it has guaranteed also lose their top rating.

"Ican't think of a credit watch action in my 32 years in the muni bondmarket that had that many securities involved," Richard Larkin, amunicipal bond expert at JB Hanauer & Co., said in an interview onMonday.
Moody's said at the top of its U.S. public finance Website on Monday that ratings may not be up to date on the site becauseof the large volume of rating and watchlist changes resulting from itsbond insurer actions.
It's too early to tell if Moody's actionswill affect muni bond prices, but it could cause widespread problems iflots of investors try to sell securities that have been put on reviewfor possible downgrade, he added.

"The problem here is thatthere are so many investors with these securities. So people you'retrying to sell securities to may be trying to sell some of the affectedsecurities too," Larkin said. "In normal cases, when a security is cutto AA from AAA, the value of the bond would go down."

Bondinsurer problems have already affected the muni market. In the past,the price of a municipal bond backed by a triple-A rated bond insurerwas definite and secure. But now, prices have become more volatile andinvestors are less sure of value, Larkin said.

The difference,or spread, between yields on triple-A rated municipal bonds and similarmuni debt that have a triple-A rating through bond insurance has beenwidening, according to David Gilliand, chief credit strategist in UBS'smunicipal securities group.

More municipalities that don'thave triple-A ratings are selling debt without bond insurance becauseof that, he added during a conference call on Monday.
A lot ofinvestors in the muni bond market have to invest in insured bonds, sothey have no choice. But other investors are worried, Gilliand said.

"Therest of the market is increasingly concerned that perhaps there is moreout there than the rating agencies are willing to acknowledge," hesaid. "There is a great unknown out there that the markets have neverconfronted before. That's creating a perfect storm in munis."