AMBAC Indemnity Corp. has questioned Pennsylvania officials about federal inquiries into a $750 million certificate of participation issue that it insured.
"We have to talk to the state if the state is being investigated," said Brian Moore, a manager in AMBAC's surveillance department.
An AMBAC spokesman said Wednesday that the insurer would, if necessary, honor its unconditional guarantee to pay interest and principal on the securities in the event of default.
But Moore said that the state's relatively strong credit rating and improved budget condition make a default unlikely.
Last week, The Bond Buyer reported that the Internal Revenue Service and the Securities and Exchange Commission have questioned state officials regarding the July 1993 COP issue, which refunded lease revenue bonds issued in 1991. The original bonds financed the construction of prisons in five counties.
Neither IRS nor SEC officiais would comment on the substance of their questions.
Pennsylvania state Republican lawmakers, led by Sen. Richard Tilghman, have alleged that the fees generated on the 1993 deal were excessive, and that the deal itself may have been illegal. Critics of the issue charge that the COPs may lose their tax-exempt status.
Officials in the administration of Gov. Bob Casey, a Democrat, have denied both charges. Sue Grimm, a spokeswoman for the governor, did not return a telephone call.
Even if the bonds were declared taxable, the state's interest payments would not increase, so AMBAC's exposure would not increase either, Moore said.
"From our perspective, the state will handle any issues that come up," Moore said on Wednesday.
But while AMBAC is not sweating the federal inquiries, others are. Investors have said that they are concerned about the IRS inquiries, echoing Moody's Investors Service officials, who said the IRS or the SEC could affect the tax-exempt status of the bonds.
Paul Hynn, an assistant vice president at Vanguard Group Inc., which holds portions of the 1993 COPs and the original bonds, said the securities have become illiquid since drawing federal attention.
While Flynn said he doubted that the securities tax exemption would be revoked or that the issue would be declared invalid, his company is trying to discover why the IRS and SEC are interested.
"It's disconcerting to investors," he said. Bond raters from Moody's and Standard & Poor's Corp. will question state officials about the federal inquiries when they meet at the end of the month. Should the securities lose their tax-exempt status, the state's GO rating could come under fire, Moody's said this week.
Because of AMBAC's guarantee, the 1993 COPs received a triple-A rating. The state's GOs are rated AA-minus by Standard & Poor's and A1 by Moody's.
