Dexia from the bottom up

Industry professionals who lived through a real muniland disaster when the auction-rate security (ARS) market exploded in 2008 have cocked a jaundiced eye at the news that the giant Belgian/French bank Dexia — a big guarantor of American municipal bonds — is on the verge of collapse.

The difference in magnitude of the two events is exponential; Dexia only backstops about $10 billion of U.S. muni bonds — many times smaller than the $400 billion ARS market that froze in February 2008 and helped precipitate the financial crisis.

Nevertheless, both shocks involved the problem of long-term municipal bonds called “variable rate demand notes” (VRDOs) which reset their interest rates every week. Even the rates on the most super-charged adjustable-rate mortgages don’t reset that frequently. Moreover, VRDOs are distinct in that if the buyer doesn’t like the reset rate they have the right to return the VRDO back to a liquidity provider, Dexia in this case, which stands ready to buy the bonds if the buyer doesn’t want them anymore. The possibility that Dexia doesn’t have the capital to buy the $9.6 billion in VRDOs is a big issue.

Reuters is reporting that Dexia has been voluntarily withdrawing from the U.S. market:

“Our exposure (to the U.S. muni market) has been diminished significantly, and that was a deliberate choice on our part,” Guy Cools, general manager of Dexia Credit Local’s New York branch, told Reuters on Tuesday.

Municipal bonds are not just for rich people

This Bloomberg interview with John Miller, co-head of fixed-income at Nuveen Asset Management, is a good overview of the current state of muniland although I disagree with his comment that “many, if not most municipal bond holders are in the highest tax bracket”.

Actually IRS data tells us that about 75% of filers who claim exclusion for tax-exempt municipal interest earn less than $200,000 per year. As with all financial assets the richest own the most by quantity but municipal bonds are held pretty broadly. It’s not just a rich persons asset class.

Further: Citibank: US Municipal Strategy Special Focus

Big, big day for Jefferson County, Alabama

The Jefferson County Commission will hold a meeting today to determine whether to accept their creditors proposal for settlement of defaulted sewer bond debt or declare bankruptcy. My opinion is that they will settle and creditors will take a haircut of about 33 cents on the dollar. This will be a very important precedence for muniland workouts. Stay tuned. Here is some of the coverage:

Bank backstops for municipals

There is a very interesting class of municipals that you may not know about.

They are called “variable rate demand obligations” (VRDOs).

Moody’s estimates the market size at about $380 billion or 13% of the $3 trillion municipal market.

Moody’s issued a report today saying that this class of munis is finding its sea legs. This is good news for muniland. The health status of VRDOs was a big concern for market participants and Moody’s is cautiously optimistic.

VRDO’s are bonds issued with longer maturities (up to 30 years) that you can put back to the trustee or tender agent with a little notice.

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