The Livable Blog

This is an interesting article from the Globe and Mail. Although given the general upset in the world financial markets, it is probably more of the same. The subprime mortgages in the US were packaged as part of the CDO's (mentioned in article below) to cover up the risk involved. Now the whole financial world is holding its collective breath, waiting to see where the next casualty will be on a day by day basis. The banks won't lend to one another because no one knows how this risk is spread around. The fact that oil is at $90 per barrel does not help the situation either, especially when you consider it was at $52 per barrel exactly a year ago.

What does this have to do with the Gateway Project you say? Probably much more than the proponents of it care to admit. As financial dominoes start to fall and oil prices stay high or continue to climb, everything changes. The BC Provincial Government is no more immune to these financial issues than we are. Sure the Canadian $ has gone up substantially, which is why we are not now paying around $1.40 for a litre of gas. However, the top 3 peak oil experts (go to Sundays articles) all say that oil will go much higher. There are more than 25 countries around the world that have experienced substantial energy shortages in the last 3 months. Not just oil shortages, but also coal shortages in China.

Lets hope that Minister Falcon knows when to say "Uncle" and throw in the towel with the Gateway Project and work with us to build a proper transit system that everyone can use all the way out to Chilliwack.

Insurers' woes may boost cost of B.C. bridge
TARA PERKINS
FINANCIAL SERVICES REPORTER, With files from Bloomberg News
January 26, 2008

The Golden Ears Bridge project is billed as the biggest improvement to Vancouver's road system in more than two decades, creating a six-lane toll bridge that will link communities on either side of the Fraser River.

The local transportation authority, Translink, chose a group led by Germany's Bilfinger Berger AG, a major transportation contractor, to finance and build the project that will chop commute times for local residents.

After nearly $1-billion in bank financing was arranged, the deal received a number of awards, including 2006 Global Deal of the Year from Britain's Infrastructure Journal. It was the first time a Canadian public-private partnership project had its debt guaranteed by a bond insurer, giving it a triple-A rating that lowers the interest costs.

But the project, scheduled to open in 2009, might become increasingly expensive for Bilfinger, its equity investor.

Following negotiations in London, bond insurer Ambac Financial Group Inc. agreed in early 2006 to "wrap" half of the bank loans - guaranteeing them to boost the credit rating and lower costs. XL Capital Assurance Inc. wrapped the other half.

Two years on, those bond insurers (and their competitors) are on the brink, posting massive losses. Fitch Ratings has downgraded both. Moody's and S&P are reviewing ratings. The two insurers depend on stellar ratings to guarantee hundreds of billions of dollars in debt.

Bond insurers, known as monolines, lend their high ratings to $2.4-trillion (U.S.) of municipal and structured finance debt. If they are downgraded, ratings on the debt they guarantee - including thousands of schools and hospitals in the U.S. and elsewhere, and complicated securities owned by banks - will be tossed into doubt.

Analysts at Barclays Capital estimate global banks might need up to $143-billion in additional reserves to keep regulators happy if downgrades ripple through the system. The amount would be much smaller if insurer's ratings were cut just one level to double-A, rather than to single-A.

Bond insurers' troubles will not affect the Golden Ears Bridge Project or Translink, said spokesman Ken Hardie.

There will be no implications for the project itself, agreed Massimo Polveraccio, senior vice-president of project and corporate finance at Bilfinger Investment Co.

Some provisions in the deal are subject to rating actions from Moody's and S&P. Financing costs could rise in connection with the degree of any downgrade. Bilfinger would be on the hook for those, according to people involved. (It is Translink that sets the tolls, which would not be impacted, they added.)

Mr. Polveraccio said he's "obviously not happy. Particularly because this is something that's generated by a systemic problem, as opposed to a project or a sponsor or an equity problem.

"Certainly nobody - even this summer - would have foreseen that all of the monolines would get into this situation."

Bond insurers ran into trouble after stretching beyond municipal insurance into structured finance.

This week, credit-rating agency DBRS - which does not rate monolines - said a majority of Canadian collateralized debt obligations (CDOs) are exposed to bond insurers, but the exposure is limited. Most of the CDOs are held within the troubled third-party asset-backed commercial paper sector. Sixteen per cent of the CDO transactions would see their ratings slip if all of the bond insurers defaulted.

This week New York State Insurance Superintendent Eric Dinallo announced a plan to seek help for bond insurers, and he's been pushing big Wall Street banks to step in. He said "any effective plan will take some time to finalize."

More recently, there has been speculation New-York based billionaire Wilbur Ross might buy Ambac. Mr. Ross made his fortune by revamping troubled textile and steel companies, and has been sniffing around bond insurers for weeks now.

In a note to clients yesterday called "Monolines are key to CIBC's stock," RBC Dominion Securities analyst Andre-Philippe Hardy said the outlook for financial guarantors is deteriorating.

CIBC has $551-million (U.S.) hedged with Ambac, and $3.9-billion hedged with four triple-A rated guarantors, he said.

"A successful resolution of financial guarantors' capital issues would be positive for CIBC, but the timing and chances of success [are] still uncertain," he wrote.

Blackmont Capital analyst Brad Smith thinks there's a good chance that $2.6-billion of CIBC's exposure is guaranteed by Security Capital Assurance, a bond insurer that's been downgraded by Fitch.