| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Higher Muni Ratings May Further Hit Bond Insurers |
By Romy Varghese
A DOW JONES NEWSWIRES COLUMN
Moves by Moody's Investors Service and Fitch Ratings to raise municipal-bond ratings provide the latest hit to bond insurers.
The bond-insurance industry has had a tough few years, and only one company that existed before the turmoil is insuring new municipal bonds. In the heyday, half of new municipal bonds carried insurance; in the first quarter this year, only 6% did, according to Thomson Reuters.
Now Moody's and Fitch are adjusting ratings of many investment-grade municipal borrowers to reflect the same standards other kinds of issuers, such as corporations, are held to. Since the previous system didn't emphasize default probability, many munis will see higher ratings once the process is completed.
"They're in the business of providing comfort," said Christopher J. Mier, municipal strategist at Loop Capital Markets in Chicago, about bond insurers. "The higher ratings suggest the comfort is not needed."
Bond-insurance companies pledge to cover the principal and interest payments to bond holders if the debt issuers default. Key to a bond-insurance company's business is its rating, since the insurer effectively lends its rating to lower-rated clients who can then sell debt at cheaper rates.
The most successful bond-insurance companies in the past carried the top credit rating of triple-A. The industry was hit in the fall of 2007 by exposure to complex securities based on the slumping real estate market. Former leaders began to see losses and ratings downgrades, and issuers and investors recoiled.
Of the so-called legacy insurers, only Assured Guaranty Ltd. (AGO) has high ratings and is writing all of the new muni business that is insured. MBIA's (MBI) effort to split its business and have a municipal-bond only unit, National Public Finance Guarantee Corp., is mired in litigation.
Meanwhile, potential start-ups have yet to enter. Municipal and Infrastructure Assurance Corp., or MIAC, has received ratings, but saw one investor, Citadel, depart. A spokesman for Macquarie, which still backs the venture, declined to comment on the company's progress.
Another company, now called BondFactor Company (formerly BondModel), declined to comment "as we await the outcome of developments currently in process as regards the firm," founder George Butcher said in an email.
With more municipal issuers seeing higher ratings, there may be less need for them to buy insurance on their new bonds to lower their interest rates. Moody's, which wraps up its recalibration in mid-May, increased the ratings of 35 states.
While he expects bond insurance to rebound eventually, CreditSights analyst Rob Haines said he thinks the recalibration will damp its recovery so that guarantees may only cover about 20% of new municipal issues.
Instead of guaranteeing solidly double-A rated munis as they did in the past, bond insurers would target those who can benefit from their vetting. Although conditions in the $2.8 trillion muni market have improved, some municipal agencies don't find favorable rates because they issue debt infrequently, they don't have credit ratings or they have low ratings.
"Investor demand for credit enhancement will persist albeit at a lower market rate," said Tom McLoughlin, chief executive of MBIA's National Public Finance Guarantee Corp. He expects insurance to cover about 30% of new municipal bonds in five years.
Florida Municipal Loan Council, which pools and sells bonds on behalf of Florida municipalities, hasn't sold any issues in two years because of the decimated bond insurance industry, said Jeannie Garner, finance director of the Florida League of Cities. "It's put us dead in the water," she said.
The council, which has sold $743 million since 1999, had bought MBIA insurance previously and may not be able to secure Assured Guaranty insurance for an issue it hopes to sell in the late summer, she said.
She supports a plan by the National League of Cities to create a non-profit issuer-run mutual bond insurer. The group is reaching out to senators to seek support for the plan, which calls for a $3 billion interest-free loan to launch the firm.
From the investor perspective, bond insurers vet the financials of municipalities, who don't have the same reporting and accounting requirements as corporate borrowers. Bond insurers also regularly assess the credits they guarantee and can address any problems that arise. "I think that is still an issue that needs to be addressed regardless of where the ratings are," said Assured Guaranty President and Chief Executive Dominic Frederico.
(Romy Varghese covers municipal finance for Dow Jones. She can be reached at 215-656-8263 or romy.varghese@dowjones.com)
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