Bonds so dubious, Texas won’t even try to get them rated

People need to read with great care the document posted in the last email from the Texas Public Finance Agency.  I’m reprinting it below for convenience. Basically what it says is that the bond market is dubious about the ability of the Texas Windstorm Insurance Agency to pay back the $500 million it borrowed recently and, as a result, the interest rate TWIA pays will go up. The outlook is so bleak that Texas isn’t apparently even going to waste money in a futile gesture to try to get the bonds rated. The resulting increase in the interest rate isn’t in and of itself a gigantic problem — unless, of course, a surprise storm means TWIA doesn’t have the cash next summer to pay it back in full (in which event the interest rate on $500 million jumps to 8%.)

What is a huge problem, however, is the growing evidence that TWIA will be hard pressed to borrow under the existing statutory scheme the money it will need to pay back claims following a major storm.  Just to repeat, no ability to borrow, no ability to pay claims, at least not in full.  That means many households and businesses on the Texas coast who were banking on TWIA will not be able to rebuild and may not be able to pay their mortgages. If first line bondholders are demanding 8%, what higher rate are second and third line bondholders likely to demand following a storm? Conceivably the market will have more confidence in Class 3 assessments because those are paid by insurers, but I doubt they will feel any better about Class 2 assessments paid mostly by coastal policyholders than they do about the Class 1 bonds, which the market apparently does not regard as investment grade.

And those with cash are going to be able to put the squeeze on TWIA following a storm.  That’s because an additional consequence of an inability to borrow is that TWIA won’t be able to access the large reinsurance policy it spent $100 million on this year.  The reinsurance contract is written so that it doesn’t matter if TWIA is liable to pay its policyholders.  Ours, like most reinsurance policies, is an indemnity policy.  The reinsurers don’t pay until TWIA pays.  But if TWIA can’t borrow then TWIA can’t pay.  So, unless TWIA is willing to kiss a $100 million premium goodbye, it’s going to have to take what the unfeeling bond market offers.

So maybe some coastal politicians are right that we don’t need to worry much about all this because, after all, the odds of a serious storm hitting the Texas coast are just as remote as, why, a hurricane hitting New York City.  On the other hand …

A scary document from the Texas Public Finance Agency

A scary document from the Texas Public Finance Agency

Thanks again to David Crump who has brought this document to my attention.

4 thoughts on “Bonds so dubious, Texas won’t even try to get them rated

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