BILLIONS of dollars' worth of corporate bonds issued by energy and infrastructure companies, including the owners of Melbourne Airport, are likely to come under pressure after the US insurer standing behind their debt had its credit ratings cut to junk.
While investors are largely expected to look through the latest credit downgrade to New York-based MBIA, the lack of insurance backing infrastructure bonds threatens to turn off many fund managers. The downgrade has also affected a $66 million portfolio of listed notes backed by Westpac after it warned that some of the assets backing its Halcyon series of notes were below investment grade.
Ratings agency Standard & Poor's cut the credit rating of MBIA's parent three notches to BB-, or junk, because of "increased concern" that the company might report more losses tied to structured products.
The downgrade followed concerns that MBIA's billions of dollars in losses on investments in mortgage-linked securities and collateralised debt obligations could blow out further.
MBIA and US rival Ambac are among the biggest providers of bond insurance in Australia, capturing about 60 per cent of the market.
Companies such as Melbourne Airport and toll-road operator Lane Cove Tunnel have hundreds of millions of dollars of bonds insured by MBIA, a process also known as credit wrapping. However, Sydney Airport represents one of MBIA's biggest Australian exposures with almost $2 billion of bonds backed by the insurer.
Packaging bonds up with insurance offered lower-rated companies a chance for their bonds to carry a AAA-credit rating, allowing them to sell their bonds at a lower rate and to a wider range of investors.
With bonds in these companies likely to remain under pressure, analysts say the bulk of the sell-off occurred after MBIA and Ambac both lost their AAA-rating last year.
