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The City of Orlando may default on bonds issued for the purpose of constructing a new basketball arena, it is reported on this Sunday morning by Mark Schlueb and David Damron, "Orlando Risks Bond Default, Experts Warn" p. A1, col. 3 (Orlando Sentinel, Sunday, April 4, 2010).
The reported reason for the potential default is the decline in tourism since the bonds were issued. Id. Apparently people from outside of Orlando are not spending money in the numbers they used to spend money in Orlando, partly because there are fewer people from outside of Orlando who are in Orlando to spend money.
The City of Orlando has apparently been paying money to maintain a so-called "insurance policy" issued by an unknown, unnamed company. The "insurance policy" has an unfortunate feature, as reported in the linked newspaper article:
The city bought an insurance policy that kicks in if the reserves are drained, though the insurance money would eventually have to be repaid with hotel taxes.
The major if not only kind of "insurance policy" that requires Policyholder payback when the Insurance Company pays Claims is a "fronting policy". That is just like it sounds, a policy under which the Insurance Company "fronts" payment of Claims under a Policy issued in its good name, in exchange for payback by the Policyholder of all the Claim payments made by the Insurance Company.
The author has sent an EMail to the reporters on the day of drafting this post, asking for the name of the insurance company and a copy of the "insurance policy". If that currently missing necessary information is obtained, it will certainly be reported here. And more than those things: The event of "draining reserves" of the City's treasury sounds very like an "event of default" which is a trigger for payment on Credit Default Swaps and on Collateralized Debt Obligations, which in basic terms are groups of Credit Default Swaps. What if any CDSs and CDOs has the City obligated itself or otherwise entered into with Taxpayer money here?
There is more at work here than an unknown, unnamed "insurance policy". Stand by. Further developments will be by presently.
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