How Is a GIC Protected if the Provider Is Downgraded?

How a GIC is protected if its provider is downgraded comes down to two layers: provisions negotiated into the contract itself, which name the rating levels that trigger remedies and the remedies that follow, and state statutes that can add rating or collateral requirements of their own.

A GIC is, in the MSRB glossary's general definition, an investment secured by a contract with a financial institution that guarantees a fixed rate of return and a fixed maturity, though bond-proceeds GICs often carry flexible draw schedules rather than a single maturity date.

Credit protection is where the safety first priority does its work, since a GIC's payments rest on the provider's promise and, where the contract or state law requires it, on collateral held against that promise.

Among bond-proceeds investments, this page stays on one question: what happens to that credit protection when the provider's rating falls.

What provider rating thresholds apply to a GIC?

Rating thresholds appear in two places: some state statutes set a credit floor a provider or its guarantor must meet before the contract is bought, and contract schedules set the levels at which downgrade remedies activate while it is outstanding.

Colorado's investment statute, C.R.S. §24-75-601.1(1)(l)(I), authorizes guaranteed investment contracts, guaranteed interest contracts, annuity contracts and funding agreements if, at the time the contract is entered into, the provider or its guarantor is rated in one of the two highest categories by two or more NRSROs.

The Colorado rating can be a long-term credit rating, a rating of financial obligations, a claims-paying ability rating or a financial strength rating, and the statute applies its test when the contract is entered into; the statute text read for this page sets out no downgrade remedy.

Texas addresses ratings after purchase: Texas Government Code §2256.021 says an investment that loses a required minimum rating is no longer an authorized investment while it remains unrated, and the governmental entity must take prudent measures to liquidate it.

The §2256.021 rule reaches investments that require a minimum rating under the subchapter, and the Texas GIC provision conditions authorization on collateral rather than on a provider rating, so the rating rule and the collateral rule do different work.

Contract schedules are the second source of thresholds: in the FY2008 Form 10-K it filed in March 2009, Ambac reported that the downgrade triggers in most of its investment agreements were based on the lower of the Moody's or S&P rating.

A lower-of-two-agencies construct puts the schedule at the weaker rating, so a provider rated above the trigger at one agency and below it at the other is already in trigger territory.

Because the contract's schedule is negotiated before the sale, the trigger levels and the agencies whose ratings count are bid specification terms.

What triggers collateralization?

A collateralization trigger is the provision that converts a rating event into an obligation to post securities, and in the agreements Ambac described it was one of several cure provisions the downgrade set off.

Ambac's FY2008 10-K reported that its 2008 downgrades triggered cure provisions in nearly all of its investment agreements and that most agreements offered several remedies, including collateral posting.

Statutes can write collateral into the authorization itself: under Texas Government Code §2256.015(a), a GIC is an authorized investment for bond proceeds if it has a defined termination date, is secured by obligations of the United States or its agencies in an amount at least equal to the amount of bond proceeds invested under the contract, and the collateral is pledged and deposited with the entity or a third party the entity selects and approves.

The eligible collateral is limited to §2256.009(a)(1) obligations, excluding the mortgage-backed instruments listed in §2256.009(b), and §2256.015(d) applies §1371.059(c) to the execution of the contract.

The §2256.015 authorization covers bond proceeds, not an issuer's general operating funds.

For repos, Federal Reserve Bank of New York staff research defines the haircut as the amount by which collateral value exceeds the cash lent, so a $95 loan against $100 of collateral carries a 5% haircut.

GFOA's 1986 statement on repurchase agreements said over-collateralization, commonly called haircuts, or marking-to-market practices should be mandatory procedures, and that delivery or safekeeping of the underlying securities with the purchaser's custodian significantly reduces risk.

In the tri-party repo market, clearing banks provide collateral management services such as daily revaluation of assets and daily remargining of collateral, as Federal Reserve research published in 2012 describes.

Repo collateral and margin mechanics are the subject of the repo collateral page, and the product-level choice between the two structures is on the GIC or repo comparison.

What replacement and termination rights follow a downgrade?

Past collateral, the other remedies in the agreements Ambac described were termination and replacement: the investment agreement contract can be terminated, or a replacement guarantor can be designated to stand behind it.

Ambac's filing listed the remedies: "Most investment agreements contain multiple possible remedies, including collateral posting, a termination of the investment agreement contract, both of which introduce liquidity risk, or the designation of a replacement guarantor."

The same 10-K reported that Ambac could usually choose among the remedies, so which party controls the choice after a trigger is one of the terms a solicitation can settle before bids arrive.

The filing describes collateral posting and termination alike as introducing liquidity risk, the concern the GIC withdrawal provisions page takes up.

A replacement designation works differently, since the agreement stays in place and a different credit stands behind it.

What did the 2008 provider downgrades show?

Ambac's 2008 downgrades showed, in its own account, a rating event triggering cure provisions and collateral then being posted.

Ambac's FY2008 Form 10-K reported that the November 5, 2008 downgrade of Ambac Assurance by Moody's resulted in a significant amount of collateral being posted by its investment agreement and derivatives businesses.

The same filing reported that its investment agreement portfolio shrank as agreements were repaid, and it counted the Lehman Brothers bankruptcy, which gave some counterparties termination rights, among the causes of repayment.

For context on the book those contracts sat in, the 10-K says Ambac provided investment agreements, including repurchase agreements, primarily to issuers of asset-backed and structured finance debt and, to a lesser extent, to municipal issuers, through its wholly-owned subsidiary Ambac Capital Funding.

One provider's annual report is not a survey of the GIC market, and what a downgrade meant for a given issuer turned on the remedies its own contract named.

The SEC has described these products as instruments tailored to a municipality's specific collateral and spend-down needs, such as GICs, repos and forward purchase agreements, and has described competitive bidding run by bidding agents as the most common way to establish fair market value.

On the roles around a bid, the SEC has said a provider of a GIC is generally not a municipal advisor so long as it does not engage in municipal advisory activities, such as providing advice to the municipal entity or obligated person about the purchase.

mGIC is an independent, SEC-registered municipal advisor and Bidding Agent that evaluates and bids GICs, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities while selling none of them, and its fee is paid by the winning provider, not the issuer.

When an issue's rating schedule and remedy terms are ready for the market, issuers can have mGIC bid it under a competitive solicitation.

For an investment already outstanding, mGIC's reinvestment review looks at fund objectives, permitted investments, draw schedules, credit terms, market conditions and timing, free and without obligation, through the contact page.

Final conclusions about what a contract's downgrade provisions require, and about the tax treatment of proceeds returned before maturity, belong to the issuer's bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.