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Municipal Bond Forum
FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.
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Insurance coverage
11/11/2009I hold some Xenia Rural District Water Bonds 98410ACE3. I live in Florida. The water district is having financial problems. The issue sells for 60% to 70% on a dollar of par. The district is talking about selling itself for 50 percent on a dollar of liabilities. The issue is protected by Assured Guaranty. How will it work if the district is sold for less than $143 million with the insured bonds totaling $85 million? Based on the strength of the insurance company, does the company make up the difference to par with any lost?
- J.S.,FLBond insurance covers the face amount of the bonds.
Typically, in a distressed situation, the issuer will pay the portion of the debt service it can, leaving the remainder to be made up by the bond insurer.
If water rates are raised, or other corrective action is taken, the issuer may be able, once again, to resume full debt service payments.
Insurers also have the option to pay off the entire issue in default. In such cases, they will pay the full face amount of bonds outstanding.
Prepaid gas contracts
11/10/2009In the prepaid gas contracts, is the utility able to treat the entire block of prepaid gas as an asset and "rate base it"? I suppose that would only be relevant to regulated gas utilities? Also, have you ever heard of this structure being used to sell blocks of electricity at a fixed price?
- T.A.The issuers of pre-paid gas bonds are not necessarily public utilities. The gas is sold to member municipalities at a rate discounted from what they would otherwise buy it for in the marketplace. I am not aware of a case where there is a traditional application of utility regulated pricing.
I am also unaware of a case in which this model has been applied in the electricity market. Electricity is not generally sold as a commodity, as is natural gas.
Necessary to diversify out of state?
11/2/2009I hold a 10-year laddered portfolio of Maryland state and county bonds. All are rated “AAA” to “A.” Does it make sense to diversify to other high quality states to reduce risk? Does losing my in-state tax advantage of 7.5% offset multi-state diversification?
- D.M., MarylandIf you are comfortable with the credit quality of your portfolio (and based on your description, it appears you can be), we see no reason to purchase securities issued in other states.
The state of Maryland continues to afford an abundance of credit-worthy securities to satisfy your desire for safety and diversification.
There should be no need to sacrifice the income, which would be subject to Maryland state taxes on out-of-state bonds.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.