Municipal Bond Forum

Although the bond insurance industry has seen its financial strength ratings either lowered or threatened to be lowered, this is not a reflection on the underlying bond issues and their ability to meet debt service. We can well understand your concerns, living in Ohio, a hard-hit area economically. However, while Ohio is experiencing economic displacement, its municipal credit quality remains strong. The economy is an important determinant of credit quality, but not the only factor that is taken into account. The state just had its rating reviewed on July 22, 2008, by Standard & Poor's with a very strong  “AA+” rating assigned to state obligations. In their report S&P stated the following:
"The ‘AA+’ rating on Ohio reflects the state's:
·    Long history of strong and disciplined financial management, as shown by recent budget adjustments;
·    Improved budget stabilization reserve levels through fiscal 2007 year-end;
·    Biennial budget for 2008-2009, which continues tax reform initiatives but relies on substantial cost-containment, as revenue growth remains tempered by the state's below-average economic performance;
·    Vast, broad, and diverse economic base, which is anchored by manufacturing and includes several regional centers and corporate headquarters, in addition to expanding service sectors; and
·    Moderate debt levels, with rapid amortization and a conservatively managed capital and debt program."
Obligations of cities and towns and other governmental issues are no doubt strong as well since the default rate for such bonds, even in states much weaker than Ohio, is minimal.   
 
Rest assured, the crisis affecting bond insurance is not related to the performance of their underlying municipal bond portfolios. Those are performing as well as ever. It is the mortgage backed security industry exposure that is fundamentally at fault for the bond insurer headaches we are all experiencing.

Your bonds were issued by the Massachusetts Development Finance Agency for Boston University. The bonds carry bond insurance from XLCA. XLCA has since been downgraded from “AAA” to “BBB-“. Boston University's underlying, or natural rating, is “A-“ on its own. Since the “A-“ is now higher than the bond insurer's rating, the bond carries the higher of the two.
 
Technically, XLCA's insurance is still in place as long as the company remains solvent.  However, Boston University is a strong credit on its own and has always easily met its debt service from its own funds without relying on the bond insurer. We expect this strong track record to continue.

In our 35-year history in the bond market, we have never found anyone who could accurately predict the future direction of interest rates with any consistency. The difficulties in today's mortgage market are caused more by the tightening of credit standards than by affordability based on interest rates. In general, we don't anticipate any significant rise in the 10-year Treasury bond, on which mortgage rates are based.