Corporate bonds tainted by junk rating
Sydney Morning Herald
Wednesday September 30, 2009
BILLIONS of dollars worth of corporate bonds issued by energy and infrastructure companies, including the owners of Sydney's Lane Cove Tunnel, are likely to come under pressure after the US insurer standing behind their debt had its credit ratings cut to junk.While investors are largely expected to look through the latest credit rating downgrade to New York-based MBIA, the lack of insurance backing infrastructure bonds threatens to turn off many fund managers.The downgrade has also had an impact on about $66 million of listed notes backed by Westpac Bank, which warned that some of the assets backing its Halcyon series of notes were below investment grade.The ratings agency Standard & Poor's cut the credit rating of MBIA's parent three notches to BB-, or junk, because of increased concern the company might report more losses tied to structured products.The downgrade followed concerns that MBIA's billions of dollars in losses on investments in mortgage-linked securities and collateralised debt obligations could blow out further.MBIA and its US rival Ambac are among the biggest providers of bond insurance in Australia, together capturing about 60 per cent of the market. Companies such as Melbourne Airport and the Lane Cove Tunnel operator have hundreds of millions of dollars of bonds insured by MBIA, a process also known as credit wrapping. However, Sydney Airport represents one of MBIA's biggest Australian exposures with almost $2 billion of bonds backed by the insurer.Packaging bonds up with insurance offered lower rated companies a chance for their bonds to carry a AAA-credit rating, allowing them to sell their bonds more cheaply and to a wider number of investors.With bonds in these firms likely to remain under pressure given choppy credit market conditions, analysts say the bulk of the sell-off occurred after the insurance giant MBIA and rival Ambac each lost their AAA-rating last year.Philip Bayley, who heads the credit markets advisory firm ADCM Services, said: "Most of those bond issues are already trading on the ratings of the underlying issuer anyway and the ratings of MBIA as guarantor are no longer being taken into account."Estimates put the credit-wrapped bond market at just over $20 billion, down from $28 billion two years ago.
© 2009 Sydney Morning Herald
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