Legal Alerts

Ratings Downgrades of Bond Insurers and Banking May Require Public Agencies to File Material Event Notices For Certain Municipal Bond Issues

Bond insurers and banks and their assigned ratings are currently under the scrutiny of the Rating Agencies.  Standard & Poor’s has taken the following recent actions:

• ACA Financial Guaranty Corporation – downgrade to CCC
• Ambac – AAA (placed on Negative Watch)
• MBIA – AAA (placed on Negative Watch)
• Financial Guaranty Insurance Corporation – downgrade to AA

Fitch Rating actions:

• XL Capital – downgrade to A
• Ambac Financial Group – downgrade to AA
• Societe General – downgrade to AA-
• Financial Guaranty Insurance Corporation – downgrade to AA

Moody’s has placed several bond insurers on review for a possible downgrade.

The Securities and Exchange Commission staff informally stated that press coverage of the recent downgrade of Ambac has been so widespread and extensive that, in the opinion of staff of the Division of Trading and Markets, no material event notices of this event need be filed at this time. 

However, public agencies may have contractual reporting obligations under their continuing disclosure agreement/certificate independent of Securities Law or other statements of the Commission.  Further, the downgrade of a bank providing a letter of credit or an investment product for issuers of municipal securities may also have a direct impact on such municipal securities. These obligations and impacts may arise from the following:

• Continuing Disclosure Agreement/Certificate – Issuers of municipal securities generally must provide annual financial information and notices of material events under a continuing disclosure agreement or certificate.  In accordance with SEC Rule 15c2-12(b)(5), a continuing disclosure agreement or certificate will  specify certain listed events that may be material for continuing disclosure purposes.  Among those eleven “material events” is any change in the rating of the outstanding municipal securities issued by the public agency.
• Guaranteed Investment Contract GICs – A public agency that has invested proceeds of an issue of municipal securities in a GIC with a GIC provider that has been downgraded should review, or cause its trustee to review, the terms of the GIC to determine if the GIC provider must post collateral or take other measures as a result of such downgrade.
• Reserve Fund Surety – A public agency that has obtained a reserve fund surety for an issue from a bond insurer that has been downgraded should review the terms and conditions of issuance documents to determine if the downgrade requires the public agency to replace the reserve fund surety with another higher rated reserve fund surety or with cash.
• Financial Products – A public agency that has financial products such as interest rate swaps, caps and floors from a counterparty that has been downgraded should review the terms and conditions of the bond documents to determine if a rating downgrade requires the counterparty to post collateral or take other actions resulting from the downgrade.

Public agencies are advised to monitor any changes which may affect their outstanding securities. Should you have any questions regarding these recent events or their implications, please feel free to contact any of the attorneys in the Public Finance Practice Group of Best Best & Krieger LLP

 Disclaimer: BB&K eBulletins are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué. ©2008 Best Best & Krieger LLP