Citibank's plans to sell to the public more than half of its municipal bond insurance subsidiary, AMBAC Inc., were delayed Friday because the Securities and Exchange Commission had last-minute questions about default rates in the market, according to syndicate members.
Underwriters expect to price and sell the deal by tomorrow.
Specifically, the SEC was concerned about an article in the June 14 Washington Post, which, without identifying sources, suggested the bankruptcy filing by Bridgeport, Conn., could spread through the market and weaken municipal insurers.
Budgetary pressures led "some institutional investors [to wonder] whether Bridgeport would become the first of many governmental bankruptcy filings," the article says. "Some observers said an upsurge in defaults could put pressure on the companies that write bond insurance."
The SEC's primary concern is that all pertinent information regarding the company -- and its industry -- be disclosed. Since the Washington Post article paints the municipal industry with a vaguely ominous brush, the examiner asked for clarifications on default rates and AMBAC's exposure to fiscally troubled issuers, according to an official close to the negotiations.
As a result, AMBAC's advisers will be filing another amendment to the registration documents on Monday, this time clarifying the concerns raised by the Washington Post article and ironing out smaller matters of legal language. The amendment will be the third since AMBAC filed its shelf registration May 1.
Another consideration that slowed the entire SEC approval process is the rarity of a municipal bond insurer going public. The examiner assigned to AMBAC's filing reportedly is not the same official who reviewed MBIA's stock issues, so a large amount of "education" has been required, according to one source.
The SEC's concern over default rates received apparent confirmation early today when The Bond Buyer received a phone call from an SEC researcher requesting information on municipal defaults.
Each of the top three insurers has expressed confidence that their Bridgeport policies will not be called upon and noted that even if they were, paying claims would be a financially minuscule effort. Furthermore, municipal participants dismiss the idea that seeking protection under Chapter 9 of the Federal Bankruptcy Code will flare into a full-fledged epidemic, citing municipalities' dependence on the credit markets in these recessionary times.
Officials at AMBAC referred all questions to the underwriters, who refused to comment. Executives at the insurer, however, said privately that the delay was routine and that no problems had cropped up.
The Washington Post article also quotes C. Richard Lehmann, president of Bond Investors Association, as estimating $2.3 billion of municipals will default in 1991. Annualizing the $30.18 billion issued in the first quarter, that would be a default rate of almost 2%.
The estimate presumably includes the almost $2 billion of Executive Life-backed bonds. Other sources, including the Public Securities Association, have found default rates to be far lower, at less than 1%.
A banker close to the deal said the SEC's concerns are focused almost exclusively on matters of disclosure. "Its principal involvement is to be comfortable with the disclosures that have been made," the banker said. "And their delay is a matter of being overwhelmed by equity offerings."
Currently, the underwriters plan to price the stock rather low. Based on 1990's net income of $105.5 million, a price of $22.50 per share would put AMBAC's price/earnings ratio at 7, while the $26.50 price would put the ratio at just below 9. "The lower price is cheap," said one stock trader, who asked not to be identified.
AMBAC's sales trips in the United States and abroad apparently were very successful. In Europe, institutional money funds are clamoring for the 3 million shares slated for sale overseas. And strong buying interest is coming from Tokyo, as well, according to syndicate members.