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Abstract: 

The U.S. Treasury opposes federal guaranties for municipal bonds in the Gulf disaster zone, leaving state governments as the principal backstop for local issuers. Debt relief plans are emerging in Louisiana and Mississippi, and risk to these states’ GO bonds appears containable. Congress is poised to loosen restrictions on tax-exempt bonds for the region. Rules for Single Family bonds have already been relaxed. Liberty bonds may come in substantial volume if credit enhancements are found. Virtually all ratings under review by the rating agencies are underlying credits of insured bonds. The largest uninsured bond exposures are in industrial development, healthcare, and housing, with a large number of small uninsured local GO bonds in Mississippi. The insurance industry is watching a recent insurance company appeal in Florida state court that is trying to apply the flood exclusion in a casualty policy. The trial court held that under Florida’s “valued policy” law, the face value of the standard hazard policy must be paid. Louisiana is a “valued policy” state.

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Affiliations:  1: Merrill Lynch, Pierce, Fenner & Smith Ltd.