Fitch Ratings downgrades MBIA Insurance Corporation, part of the MBIA family that includes MBIA Asset Management that oversees part of Monrovia’s and Arcadia’s portfolios.
April 2008
Arcadia’s City Council voted April 1st to continue using MBIA Asset Management Group for a second year to manage a portion of the city’s portfolio.
For the last four years, MBIA has managed from 20 to 33 percent of Monrovia’s portfolio, said Monrovia finance director Mark Alvarado.
“They’ve been able to give me good information on trends in the market,” said Alvarado.
MBIA Asset Management Group is a member of the MBIA family of companies, which also insures bonds, though MBIA’s duties for Arcadia and Monrovia are strictly limited to managing assets.
Fitch Ratings, a leading global rating agency that provides the world’s credit markets with independent and prospective credit opinions, downgraded MBIA’s insurer finance strength rating from the highest rating of ‘AAA’ to ‘AA’ on April 4th.
“The company’s claims-paying ability no longer warrants MBIA having the top credit rating from the firm,” according to a Wall Street Journal article earlier this month.
In March, MBIA Chairman and CEO Jay Brown asked Fitch to withdraw its insurer finance strength rating in a four-page letter that said the global markets are currently not functioning normally “as we have gone through the credit cyclone of the past six months. In effect, the IFS ratings have taken on a life of their own, totally disconnected from the underlying credit instruments that they enhance.”
Fitch downgraded MBIA’s rating shortly after.
“We respectfully disagree with Fitch’s conclusions,” said MBIA CEO C. Edward Chaplin. “MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio; factors which we believe enable MBIA to meet severe economic stress scenarios.”
Last March, Arcadia began contracting with MBIA after researching SNW Asset Management, UBS Global Management, RNC Genter and Smith Barney. Each company made various portfolio recommendations and predictions about what it would yield, should they handle a portion of Arcadia’s assets.
MBIA predicted a portfolio yield of 5.10 percent, the second lowest estimated yield among the five companies, but MBIA’s cost of seven to 10 basis points was the lowest of the five competing firms.
“The proposed fee for MBIA is charged on a sliding scale in basis points based on a percentage of assets under management,” according to a March 2007 staff report that recommended the Council hire MBIA.
For assets up to and including the first $20 million, MBIA’s annual fee is 10 basis points (.10 percent) and for amounts over $20 million MBIA’s annual fee is seven basis points (.07 percent), according to the staff report.
Last year’s estimated annual cost of hiring MBIA was $41,000, which remained the amount estimated for another year of MBIA’s services.
An April 1st staff report noted that as of February 2008, Arcadia’s investment portfolio totaled $89.6 million and MBIA-managed assets–$50 million—had a 4.11 percent total rate of return, while city-managed assets had a 4.40 percent rate of return.
“This was expected as MBIA took over some of the City’s poorest performing securities,” said the report.
Fitch’s new rating did not evoke concern, said Arcadia City Manager Don Penman.
“We just had a recent evaluation of their performance and we’re satisfied with the work they’re doing in terms of trying to maximize our investment portfolio and at the same time staying within the parameters and guidelines set up by the city council.”
Arcadia will review MBIA’s performance after another year, but their contract includes a provision that allows the city to terminate the agreement for any reason by giving MBIA a written notice at least 30 days prior to the requested termination date.
