Many of the tax-exempt put bonds insured by Mutual Benefit Life Insurance Co. are virtually guaranteed to default due to remarketing clauses in the indentures, according to trustee officials.
The fixed-rate put deals contain language that revokes the bond-holders' right to keep the securities at the next available put. In essence, investors will be forced to put the bonds back to the remarketing agent and lose all of their principal, bank officials said.
Investors have tried to sell the bonds since Mutual Life was taken over by the New Jersey Insurance Commission in July. The fact that the bonds will default at the earliest put option has not, however, been calculated into the 50 cents to 60 cents asking price, traders said Friday. No actual trades have been reported.
The only event that could stop mandatory redemption would be finding and obtaining an alternate guarantor for the deals. To date, no insurer or letter of credit provider has stepped forward.
Citizens and Southern National Bank, the trustee for several of the 59 Mutual Benefit issues, sent a notice to bondholders two weeks ago outlining what is likely to happen to holders of the $21 million Fulton County, Ga., Series 1985E bonds. The bank said that because the remarketing agent has been and will be unable to provide a preliminary interest rate, as it would under normal circumstances, the indenture says, "The bonds will be subject to mandatory tender on the remarketing date."
Officials at Lehman Brothers, the remarketing agent, were unavailable for comment Friday.
Since the New Jersey insurance regulators have declared a moratorium on policy surrenders, which embraces bond guarantees, the tender would result in loss of principal, officials at various banks said. The next step would be for the trustee, acting on behalf of the bondholders, to accelerate the housing loan and in effect take possession of the underlying property, they said.
"Now I can't even sell these bonds at 60 cents, great," said an investor folding a block of the Fulton County 1985E issue.
The Fulton County deal is the closest to mandatory redemption with a Sept. 1 put date. Other put bonds range from Oct. 1 to 1995 and beyond. It is difficult to tell if all the deals contain the same clause -- contained in the Fulton County indenture's Section 202 -- but a sample of trustees found it to be a strong possibility.
"Most of these documents are pretty much mirrored off of each other," said Arthur Honore, assistant vice president at Texas Commerce Bank. "I would assume that they are somewhat similar. I'm sure our [issue] will take the same course; it just hasn't raised its head yet."
Texas Commerce is the trustee for the $10.3 million Phoenix Series 1984 deal, which has an Oct. 1 put date. Mr. Honore said the bank had not issued a notice as of yet, but that he is holding a meeting today with bond counsel to examine the mandatory redemption clauses.
Bruce Daiger, vice president in corporate trust at Sun Bank in Florida, said "it's quite possible" that the Mutual Benefit-backed issues the bank handles contain the same clauses. The remarketing failure might be triggered through another clause, as well, he said, but the results would be the same.
"Either way, anybody buying them should expect to hold only until the put date," Mr. Daiger said. "Without an estimated rate, you'd have a failed remarketing. Right off the bat that would cause the trustee to draw on the guarantee."
The mandatory redemption of the fixed-rate put bonds is new territory for the New Jersey Insurance Commission, Mr. Daiger said. The commission "has said that it won't pay for puts at the option of the bondholder at this time. But what they'll do in the event of a mandatory tender is unclear," he said. "It will be interesting what happens to Fulton County."
Sun Bank is trustee for eight issues, all from the Florida Housing Finance Agency. Sandra Thompson, assistant vice president and corporate trust officer for six fixed-rate deals, pointed out that bondholders should not consider it a total loss since they will recoup funds from the underlying properties.
The sequence of events likely to occur will take the municipal market into "entirely new ground," according to Kevin Kirby, vice president at Citizens and Southern.
He said the bonds will revert back to the owners, even though they have lost their principal in the process, but the interest could well be awarded anyway. To date, New Jersey's Insurance Commissioner Samuel Fortunato has said interest payments will be made.
"What we would have is the interest and not the principal," Mr. Kirby said. "We've never gone into a remarketing like this."