In a move to break the logjam in the municipal credit market and lower government borrowing costs, NLC is requesting start-up capital from the U.S. Treasury Department to create the first-ever mutual bond insurance company, called Issuers Mutual Bond Assurance Company (IMBAC). In a May 12 letter to Treasury Secretary Timothy F. Geithner that included a preliminary business plan for the company, NLC Executive Director Don Borut said, “A new, stable, reliable, mutually owned triple-A municipal bond insurer will greatly assist in financing the projects that will help us meet the recovery goals by reducing state and local borrowing costs.”
Mutuals are successful and policy-holder focused company structures that have been used since insurance began centuries ago. Building understanding and acceptance of this form of business by bond industry participants began with an NLC briefing in New York City on May 15 and widespread distribution of the business plan for review and comment. Among the issues raised in the meeting was the specter of political interference in the underwriting process — a concern that NLC anticipated and is working to mitigate.
NLC was advised to pursue the creation of a new mutual insurer by a Blue Ribbon Commission on Credit Enhancement composed of issuer representatives and industry participants. The commission released a report last January summarizing its findings about market conditions in the fall of 2008 and the need for affordable credit enhancement.
The NLC preliminary business plan articulates six principles for forming the new publicly owned municipal bond insurance company. It will have a mission-driven, public-benefit corporate culture — one that is based on providing great service to issuers and bondholders, rather than profits to shareholders.
The company will serve the public by reducing the cost of borrowing to lower taxes and fees. It will provide a modest return to the bond issuers who purchase their bond insurance from the company and limit the types of bonds it will insure to short- and long-term securities for essential municipal services.
Issuers Mutual will charge moderate and affordable premiums. Membership in the mutual will be limited to state and local governments and agencies of these governments. It will not insure the types of securities that led to the downgrades of bond insurers in the past two years.
The business plan envisages the new company insuring up to $20 billion in municipal debt in the first year or the equivalent of five percent of the total market and growing to 25 percent in year five. NLC has requested $3.0 billion in initial capital and $2.0 billion in call capital if there is strong demand for the insurance. It will also need working capital from Treasury to launch the business.
NLC proposes to repay Treasury for the requested interest-free loan as its surplus capital accumulates. The plan makes very conservative assumptions about losses based on historical experience. The average premium used in the business plan is 70 basis points. That amount would vary on an issue-by-issue basis depending on the creditworthiness of the individual bond issuers.
The company and its affairs will be overseen by a board of directors. It is expected the company will be organized under the laws of New York State. In discussions with the New York State Insurance Department, the agency’s staff indicated it will assist the company secure licenses in other states.
Avoidance of political influence in the underwriting process is of critical importance. The company is considering ways to avoid even the slightest appearance such as by prohibiting representatives and former representatives of issuers to serve on the board’s underwriting committee, publishing the company’s underwriting criteria, and publishing the results of an outside audit of its underwriting practices.
Overall, market participants have been supportive of the new endeavor in part because the company proposes new levels of operational openness, transparency, and accountability. There also is the great opportunity to help solve market problems which include deteriorating credit quality, lack of liquidity, limited market access for small issuers and the need for adherence to financial best practices.
Release of the NLC business plan coincided with reports that the Treasury Department is working on a plan to help cities and other government borrowers obtain money at cheaper rates. Accordingly, NLC is stepping up its efforts to promote a new Main Street rather than a Wall Street financial guarantee provider.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has circulated draft legislation to address municipal bond market issues and held a hearing on May 21 to examine ways to improve the efficiency and oversight of municipal finance. The bills do not contain a federal guarantee for general obligation bonds, a provision Frank said earlier this year that he would consider.
Details: The IMBAC business plan is available at www.nlc.org. Comments on the plan may be submitted to Cathy Spain at spain@nlc.org or (202) 626-3123.
