As you may know, many of the major bond insurance firms in the municipal bond market have either seen their ratings downgraded or placed on negative credit watch or outlook by the leading municipal credit rating services (Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Ratings). These changes have stemmed largely from the insurers’ exposure to investment vehicles tied to subprime mortgage loans. The credit rating agencies have indicated that their ratings on insured bond issues will in most cases decline as the ratings of bond insurers are lowered. In general, the rating on insured debt will be the higher of (i) the insured rating determined on the basis of the financial strength rating of the insurer and (ii) the underlying rating, if any, assigned to the issuer.
As of February 19, 2008, Fitch Ratings has downgraded the insured rating on issues insured by AMBAC Assurance Corporation (“AMBAC”) and Financial Guaranty Insurance Company (“FGIC”) to AA from AAA. Fitch Ratings has also downgraded the insured rating on issues insured by XL Capital Assurance (“XL Capital”) to A from AAA. Moody’s Investors Service has downgraded the insured rating on issues insured by FGIC and XL Capital to A3 from AAA, and has downgraded the insured rating on issues insured by Radian Asset Assurance (“Radian”) to Aa3 from Aaa. Standard & Poor’s has downgraded the insured rating on issues insured by FGIC and Radian to AA from AAA. The actual rating on any particular bond issue may also depend on the underlying rating, if any, assigned to the issuer.
The three major rating agencies are actively evaluating the ratings of the major bond insurance firms and developments are occurring frequently. Issuers and obligated persons of insured municipal securities should follow the actions of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Group and Fitch Ratings on a regular basis. Ratings changes are posted on each rating agency’s web site, www.moodys.com; www.sandp.com and www.fitchratings.com. Access to each of these web sites is available free of charge. In all cases prior to making any filing, issuers should check the web sites of each of the three leading rating agencies to confirm the rating status of each of their insured issues, particularly if the issuer now has an underlying rating that may be higher than the insured rating.
With certain exceptions, Rule 15c2-12 (the “Rule”) of the U.S. Securities and Exchange Commission requires underwriters to enter into agreements with issuers of municipal securities and any obligated person (as defined in the Rule) for whom financial or operating data is presented in a final official statement prepared in connection with an issue of municipal securities to provide continuing disclosure information to the municipal marketplace. At the time of issue of municipal securities subject to the Rule, issuers and obligated persons must undertake to provide financial information and operating data and notices of certain specified material events to the Nationally Recognized Municipal Securities Information Repositories (“NRMSIRs”) or, in the case of material event notices, if so provided in the undertaking, the Municipal Securities Rulemaking Board (“MSRB”). This undertaking is usually set forth in a Continuing Disclosure Certificate or Continuing Disclosure Agreement delivered at the time of issue. Among the material event information required to be provided is notice of rating changes with respect to the securities, if material. In the case of insured bonds, rating changes occasioned by a drop in the rating of the applicable bond insurer will trigger a material event filing obligation.
Issuers should review their continuing disclosure agreements to determine their reporting obligations. In some cases, the issuer may be required to give notice of the material event to a trustee or dissemination agent, which would then have the responsibility to file the material event notice with the NRMSIRs or MSRB. Issuers and obligated persons utilizing the services provided by Digital Assurance Certification, L.L.C. (“DAC”) can file material events notices electronically with DAC and DAC will make the required NRMSIR filings. A single filing can also be made electronically through the so-called “central post office” located at www.disclosureusa.org. This entity will automatically transmit the notice to each of the NRMSIRs. Issuers and obligated persons filing directly with each of the NRMSIRs, or directly with the MSRB in the case of filers subject to continuing disclosure agreements or continuing disclosure certificates that specify filing with the MSRB, should submit a statement of the material event and utilize a cover sheet in the form attached to this advisory. We recommend that any required filing with the MSRB also include a voluntary filing with the central post office or NRMSIRs directly.
The statement of the material event should describe the rating agency making the rating change, the bond issue or issues to which the rating change relates, the applicable nine digit CUSIP numbers, the reason for the change (i.e. rating agency’s downgrade of a particular insurer) and the date of the rating action. Each statement should also be accompanied by a cover sheet setting out basic information about the issuer and the bond issue or issues to which the filing relates. A form of standard cover sheet for use in making the filing, along with a list of the NRMSIRs and their respective contact information, can be accessed by clicking on the following links:
Issuers may also contact their financial advisors, legal counsel and dissemination agents as appropriate, for assistance in making any filing.