What is the credit quality of VRDOs and TOBs?
Most VRDOs and TOBs are highly rated due to credit enhancements (such as bond insurance or letters of credit), which guarantee timely principal and interest payments, as well as the liquidity facility, which provides payment for tendered bonds. In most cases, the liquidity facility requires that the municipal bonds maintain certain credit ratings. Consequently, like insured municipal bonds, VRDOs and TOBs may be affected when monoline insurers are downgraded. For example, a downgrade of the monoline insurer may trigger a “termination event” that releases the liquidity facility from its obligation to buy back the security. Funds are taking action in advance of this possibility. Some funds are unloading the securities from their portfolios by exercising the put feature to the remarking agent, thereby receiving par and accrued interest for the security. Other funds are obtaining changes to their contracts with liquidity providers to preserve the liquidity facility regardless of the monoli
