News that Warren Buffett's Berkshire Hathaway Inc. canceled $8.25 billion in credit-default swaps tied to municipal bonds shouldn't be taken as a warning sign by investors, according to municipal bond experts.
“I don't think Berkshire Hathaway or Warren Buffett was trying to send us a flare to beware the municipal market,” Stephen Winterstein, managing director at Wilmington Trust Corp., said during an InvestmentNews webcast last Tuesday.
Ronald Bernardi, chief executive of Bernardi Securities, added that it was most likely an opportunistic move by Mr. Buffett.
“We view it as a trade,” he said. “Mr. Buffett is a very smart man and was astute enough to underwrite insurance against municipal defaults back in 2008 — and he's had to pay out very little. I suspect he's made a lot of money on that trade. I don't necessarily conclude he sold because he's concerned about massive defaults in the muni market.”
DEFAULT INSURANCE
Berkshire revealed in its second-quarter earnings report that it had canceled the credit-default swaps — which act as insurance in case of municipal bond defaults — five years ahead of schedule, according to a report last week in The Wall Street Journal.
Mr. Buffett initiated the credit-default swaps in 2008, when issuers of municipal bond insurance were on the ropes.
The vanishing act by municipal bond insurers has been the biggest change to the muni landscape, Mr. Winterstein said.
“It used to be homogenous; everything was triple-A-rated,” he said of the muni market in the days before the financial crisis. “Now it's much more fractured. That makes credit quality the focus.”
The biggest shift: Some triple-A-rated bonds are now rated single-A; some have fallen as far as triple-B, Mr. Winterstein said.
“Credit research is paramount today,” he said. “An overwhelming amount of municipalities are going to pay their interest and principal back, but there are some land mines out there.”
jkephart@investmentnews.com Twitter: @jasonkephart
