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Another bad wave to wade through

At least three major US bond insurers also had exposure to sub-prime loan insurance too, reports Suman Layak.

india Updated: Feb 20, 2008 22:40 IST
Suman Layak

The bond insurer crisis in the US is threatening to affect more than 20 global banks, financial institutions and life in the country apart from dampening sentiments in equity markets globally. India, though, is still insulated from the effects of the problem.

At least three major US bond insurers, who protect bondholders against default by the bond issuers, also had exposure to sub-prime loan insurance too. These bond insurers are now under the threat of being re-rated as a result of which, bonds that they have insured will also get re-rated.

That has started a chain of reactions, which has affected availability of student loans and auctions of municipal bonds in USA.

India is not affected yet though. Managing director of Fitch in India, Amit Tandon said: “It doesn’t impact India in a major way at all. However sentiment has been affected and that has had some impact on equity markets.”

Fitch is one of the rating agencies that is expected to downgrade the loan insurers from AAA to AA. Even Standard & Poor and Moody’s are studying the issue and a possible downgrade. Bond insurers such as MBIA and Ambac Financial Group moved into sub prime mortgage market as it looked attractive till last year. When that market collapsed it wiped off billions in capital for the insurers and raised questions about their ability to meet obligations.

Vivek Ramakrishna, head of fixed income credit analysis at Standard Chartered also doesn’t see too much of a problem for Indian companies apart from the fact that if they raise capital through bonds the interest rates may be higher.

Tandon points out: “The Indian municipalities are largely not raising capital from the markets and therefore they should not face any problem due to the bond crisis.”

The curb on external commercial borrowing coupled with the liquidity crisis in USA has already brought down the fund raising by Indian companies in the global markets by a long way. In fact there were no bond deals reported in January 2008 compared to $2.4 billion in January 2007.

Meanwhile there are fears in the US market that a downgrade of the bond insurers will lead to a chain of downgrades – starting with the bonds and the bond issuers as well as the bondholders. On the other hand the US financial sector is working overtime, behind the scene, to salvage the situation by delaying the downgrade and allowing the insurers to raise some funds.