Fitch Ratings scramble to revise rating criteria. Last week my Google news alerts started feeding me news stories about the crawfishing going on at Fitch Ratings as they scramble to redefine their rating criteria in a attempt to rescue their tattered reputation as a credit rating agency. The boys and girls at Fitch Ratings had gotten sloppy and much too cozy with the people they were rating. That’s why financially flimsy organizations like MJMEUC with no business experience, no reserves and no grown-up accounting system in a business that banks will not touch because they will soon be carbon-taxed out of existance, have gotten "A+" ratings based upon nothing more than some nice PR Kincheloe wrote up and mailed in.
Fitch also accepted at face value audits from an audit firm that couldn’t find its way to the CPA disciplinary committee with both hands. Williams Keepers, LLC, the audit firm MJMEUC hired to do their annual audits had said nothing to Fitch Ratings during the critical ratings review period about the “material weaknesses” and “significant deficiencies” in the consortium’s financial condition that they confessed this year were ongoing but which they had overlooked in all previous audits. Williams Keepers apparently only discovered this year, after Fitch Ratings had officially granted MJMEUC’s “A+” rating, that all Kincheloe’s investment organizations were using Quickbooks (for Dummies), that they had “lost” (as in: stolen, embezzled or fell behind the potted plant?) over $340,000, that their reserves were nearly non existent and that they had consistently omitted important information required by GAAP (the governmental accounting standards board) on Kincheloe’s $2 Billion in highly leveraged investments in coal-fired power plants. How convenient for MJMEUC.
Fitch to Revise Liquidity Assumptions for Covered Bond Ratings Fitch Ratings-London/Paris/Frankfurt-17 October 2008: Fitch Ratings is in the process of updating its qualitative and quantitative assessments of liquidity risks that covered bond investors are exposed to following an issuer default, in view of the ongoing liquidity crisis. It will publish its conclusions in a report during the fourth quarter of 2008.
Liquidity concerns affect covered bond ratings in two ways: on one hand, it may lead to a cap on the rating which the covered bonds may reach relative to the Issuer Default Rating (IDR), a relationship expressed through the Fitch Discontinuity Factor (D-Factor); and it impacts the level of over-collateralisation consistent with a certain rating scenario.
Fitch is conducting an intensive review of liquidity gap scores that form part of the D-Factor assigned to rated programmes. "We are re-assessing solutions used to overcome liquidity gaps that could arise after an issuer default," says Suzanne Albers, a Senior Director in Fitch Covered Bonds team in London. "The expected worse D-Factor will ultimately translate into a tighter relationship between the IDR of a financial institution and its covered bond rating."
At the same time, the agency is revising upwards its assumed refinancing costs and fire sale discounts, which are used to model the proceeds of asset sales should they be needed to repay covered bonds. "As a result, Fitch anticipates increased over-collateralisation being necessary to be in line with a given covered bond rating. The mismatches between a programme's asset and liability cash flows will determine the scale of the impact", says Dr. Holger Horn, a Senior Director in Fitch Covered Bonds team in Frankfurt.
Fitch Ratings confess in the standard disclaimer which can be seen on their site that (emphasis ed), “Ratings are based upon information obtained directly from issuers, other obligors, underwriters, their experts, and other sources Fitch Ratings believes to be reliable. Fitch Ratings does not audit or verify the truth or accuracy of such information, and has undertaken no obligation to so audit or verify such information or to perform any other kind of investigative diligence into the accuracy or completeness of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate and Fitch Ratings assumes no responsibility for this risk. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information.”
Auditors have similar weasely disclaimers so between the two of them it is fair to conclude that financial ratings and hired audits are just so much expensive toilet paper. As some financial pundit recently put it, the whole structure of ratings, investing and financing that just collapsed was, “A financial mass delusion based on fictitious value of imaginary assets. It’s like finding out that Santa Claus is real because you caught him robbing your house.”
“We are re-assessing….gaps that could arise after an issuer default,” means, “We can’t afford to get caught with our panties down around our ankles as more companies we gave “A” ratings to go into the toilet." Fitch Ratings, Moody’s and Standard and Poor’s are all belatedly trying to repair the vast damage they’ve done in misleading investors into buying issues they rated with a generous rubber-stamp. The following articles about the Western Municipal Water District and M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project are the beginning of what will become a flood of similar refundings of bond issues to buy back the ARS – auction-rate securities - and other toxic derivatives that public entities and other gullible or greedy people have only recently realized they own. When you are forced to refund your bond issues, the same people who sold you the toxic waste (that you’re trying to buy back before your ARS counterparty interest rates kill you) will charge you the same outrageous rates and fees to repair the problem as they did when they conned you into this “good as cash” derivative scheme in the beginning. However their refunding fees come down dramatically if they’re threatened with a lawsuit for the fraud they committed during the initial funding. Notice that at least 60% the M-S-R "variable rate demand bonds "are being refunded with fixed rate bonds. (emph. ed)
Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien...Tue Jun 17, 2008 6:26pm EDT Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien Revs 'A+' SAN FRANCISCO--(Business Wire)—
Fitch Ratings has assigned a long-term 'A+' rating to M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project subordinate lien revenue bonds, series 2008L. In addition, Fitch has assigned an underlying 'A+' rating to M-S-R's $62.5 million Series 2008M, and$18.3 million Series 2008N bonds. The Series 2008M and 2008N bonds are variable rate demand bonds that are secured by a direct-pay letter of credit. The bonds are expected to receive structured ratings nearer to closing. The series 2008L bonds are fixed rate bonds. With the exception of approximately $10 million, the entire proceeds of the three series of bonds will be used to refund existing variable rate debt. All three series of bonds are secured by a net revenue pledge of the agency, subordinate to M-S-R's senior project revenue bonds. The Series 2008L bonds are scheduled to price on July 8th. The Series 2008M and 2008N bonds are scheduled to price on July 23rd.
Fitch also affirms the underlying 'A+' rating on the outstanding $73.65 million in senior lien San Juan project revenue bonds and the 'A+' rating on the outstanding $138.33 million of parity subordinate lien San Juan project revenue bonds. The Rating Outlook is Stable.
The ratings reflects the underlying credit quality of M-S-R's three members: The Modesto Irrigation District (rated 'A+' with a Stable Rating Outlook by Fitch), the City of Santa Clara dba Silicon Valley Power ('A'/Stable), and the City of Redding (rated 'A+'/Stable). Bondholders are supported by absolute and unconditional take-or-pay purchase power commitments with each of the members that extend for the life of the debt with a 25% step-up provision in the event of a member default. Payments by the members are made as an operating expense of their respective electric systems, ahead of each member's own direct debt payments. (more…)
Notice also the similarities to MJMEUC's collateral pledges in their investments in the M-S-R structure of unconditional “take-or-pay” contracts and “step-up” agreements. This is another “joint-agency” operation like MJMEUC but apparently without a MoPEP rat-trap contract. The coal power boys encouraged people like Kincheloe to organize these quasi-governmental entities to provide them with back-door financing when it became obvious the big banks were shutting the door on funding more of their dirty smokestack power. When high-dollar businesses like giant shopping malls and coal-fired power plants are too high-risk for big banks to finance, the practice now seems to be to find some greedy politicians to help you sucker the ignorant public into floating TIF bonds or "joint commission" revenue bonds so the unsuspecting public can become your high-risk bankers.
The problem with saving yourself from the frying pan by issuing another set of bonds to buy back your dirty auction-rate bonds is that many public entities that used the Missouri Development Finance Board (MDFB) to issue their bonds did so under the mistaken assumption that the financing costs and underwriter’s fees would be cheaper from a state agency. No one has ever proven that to be true. When desperate municipal refunders have to pay the same fees a second time to get their “rescue” bonds to cover the same money from their auction-rate derivative mistake, it sure as hell ain’t cheaper.
Most of MAMU clients still don’t know that their "lease-purchase" contracts for local utility projects that MAMU pimped to the MDFB were bonds converted to derivatives. The people who sucked them into this scam (that’s Kincheloe and MAMU) aren’t going to tell them how screwed they are now and risk bringing down on their heads a lawsuit for securities fraud. By the time everyone figures out they should have avoided MAMU and their unnecessary 1.5% middleman admin fee for 20 – 30 years and gone straight to MDFB to get plain old vanilla bonds, there will be such a rush to the exit that the refunding bond market will be glutted. A ‘buyers market’ means the seller pays dearly for his gullibility and bad market timing. Buyers of refunding bonds will also be able to cherry-pick the refunding offerings – that’s not to the seller’s advantage.
Has anybody seen our $18,000,000? This summer the non-reading “see-no-evil, hear-no-evil” members of the Rolla City Council handed over the authority to sign all the loan papers “after the blanks were filled in” to their appointed utility board for what they are still convinced (or prefer to believe) was a plain $18,000,000 “lease-purchase” contract with MAMU. It wasn’t of course, it was more of the same trash that had already glutted the ARS market and caused it to collapse in February. The Rolla Utility Board immediately started pouring concrete for their big project. We don’t know exactly what their project is really all about because they claimed the Patriot Act and National Security prevents them from disclosing the details of this massive public debt to the ratepayers. Their little engineering report might give aid and comfort to the terrorists they’re convinced are lurking behind the Quick Mart. Unfortunately, the pile of papers that constitute their signed and sealed $18,000,000 MAMU-MDFB utility bond lease-purchase derivative auction-rate securities loan is still sitting unfunded on the desk of some MDFB employee because the auction-rate securities market shut down in February, their Wachovia underwriters have gone belly-up and the entire credit market collapsed this month. Could more things have gone wrong with one project?
Their check is not exactly in the mail but RMU has started the project using their reserves anyway. Their $18M signed credit card – the equivalent of Bearer Bonds - is sitting on someone’s desk in Jefferson City for anyone to use and they’re not a bit concerned.
The M-S-R San Juan article mentioned that “The delivered cost of the project to members was higher than usual at $80 per megawatt hour (MWh) due to the outages and the relatively high proportion of fixed costs (50% or $42 per MWh). The delivered cost to members is projected to range between $60-70 MWh in the next few years.” One of Kincheloe’s tactics is to always quote the $42 or $45 cost of power as produced by the new plants instead of the “delivered cost.” Delivered costs are the cost the customer pays for getting the Powder River coal delivered to the plant, the cost of producing the power and the cost of delivery of the electricity. Coal is relatively cheap…or it was until recently…but the cost of transporting it by rail to the plant is prohibitive. The costs in the M-S-R rating story are closer to the truth than Kincheloe’s vague “stable prices.” They will be stable at a much higher price than his MoPEP members think.
In the full M-S-R refunding article, Fitch Ratings for the first time admits “… long-term concerns exist related to the state's greenhouse gas legislation that may make it less advantageous to own carbon producing resources, such as San Juan.”
A shattering possibility… While it is well-documented that MAMU pool loans done for various small town utility projects were abused by converting safe and secure low-rate, long-term, revenue bonds into short-term, high-risk, variable-rate auction-rate derivatives, it wasn’t until reading about the M-S-R project and their similarities to MJMEUC that this horrible possibility came up. Did MJMEUC-MoPEP also use the $2 Billion in revenue bonds that they issued to invest in the seven power plants as derivative gambling instruments in the market that has just crashed and burned? In the case of M-S-R they obviously were doing exactly that.
The M-S-R rating review disclosed that, “The debt restructuring being implemented through the three bond series will leave M-S-R with only 18% of its debt portfolio in synthetic fixed-rate mode. (A “synthetic fixed-rate mode” is the initial fixed-rate that after only a short time coverts to a variable interest rate which is established by a 7-49 day auction.) The result of the restructuring will be a more traditional debt portfolio, with reduced counterparty risk.” The mention of “counterparty risk” is the tip off that this was an ARS because there is no “counterparty” and no “risk” in a regular revenue bond issue. We fear that Kincheloe also used his MJMEUC revenue bonds as derivatives in the now defunct auction-rate gambling market. If he did, the MoPEP sharecroppers are in a lot more trouble than even they know.
Another refunding because of auction-rate securities. (emph. ed)
Fitch Rates Western Municipal Water District (California) BANs 'F1+' Thursday October 16, 7:02 pm ET SAN FRANCISCO--(BUSINESS WIRE)--Fitch rates the Western Municipal Water District of Riverside County, California's 2008 Refunding Bond Anticipation Notes (BANs) 'F1+'. The note proceeds will refund the Series 2002 Adjustable Rate revenue bonds, currently outstanding as auction rate securities. The notes are secured by a net revenue pledge of the district's water and wastewater systems. The notes are expected to have a maturity date of less than one year. The notes are scheduled to price the week of October 27th, depending on market conditions.
The 'F1+' rating reflects the district's strong credit fundamentals, healthy unrestricted cash levels as compared to Fitch medians, and Fitch's expectation that the district will be able to access the bond market to refinance the bonds with long-term debt at maturity. (more…)
This water district probably doesn’t use Quicken for Dummies either. Refunding is full of expensive traps. If your community is smart enough to recognize their mistake in using any of MAMU and MDFB’s loan products, better get out now…the rest, like Rolla, will live in denial and get trampled in the stampede for the Exit when someone finally yells “Fire!”
