While the recent downgrades of municipal bond insurers MBIA and AMBAC would seem to be bad news for the muni bond market, private equity star Wilbur Ross sees it differently.
“The consolidation of the industry already is beginning,” Ross, CEO of W.L. Ross & Co., told Bloomberg News in a recent interview.
“That’s fine because you have to restore stability to the municipal bond market. Now it’s clear that you have a gang of three. That should clear the air and let municipal bonds trade at a better level.”
As for the “gang of three,” Ross was presumably referring to bond insurers Assured Guaranty, in which he is the second largest shareholder; Financial Security Assurance Holdings (FSAH); and Warren Buffett’s new bond insurer, Berkshire Hathaway Assurance Corp.
Assured Guaranty and FSAH have triple-A ratings, while Buffett’s company received an Aaa rating from Moody’s Investors Service.
All three of the major rating agencies — Moody’s, Standard & Poor’s and Fitch Ratings — have recently stripped MBIA and Ambac of their triple-A grades.
Ross views the rating agencies as merely having formalized the ratings cuts implied by credit default swap prices for the bond insurers.
“Will they ever get back to triple-A?” he asks rhetorically.
“That would be a very heavy lift for them given the time that agencies gave them to get their acts together before the drop in ratings. They’re effectively in run-off mode and will gradually pay off their claims.”
Despite the woes of MBIA and AMBAC, Ross has positive views of the municipal bond insurance industry as a whole, especially his own company, Assured Guaranty.
“Municipal bond insurance is still a good business and essential,” he says.
“The average municipal bond issue is something like $33 million. If smaller issuers didn’t have a triple-A credit rating wrapped around them [through an insurer], they wouldn’t have any access to capital markets, and that would have very bad ramifications for municipal governments.”
In sum, Ross says, “Municipal bond insurers provide a very essential service.”
As for his own recent investment in Assured Guaranty, Ross says, “Our belief is that there will be a much smaller number of triple-A credits on the other side of this problem. Assured’s rating was recently affirmed as triple-A/stable by all three agencies.”
That’s an important reason why the company has been able to gain market share, Ross says.
“It has taken over reinsurance of $800 million of municipal business that had originally been insured by Financial Guaranty Insurance Corp, and reinsured by PMI.”
His investment will really bear fruit after the financial turbulence ends, Ross says.
“On the other side of the credit crisis, people will be even more sensitive about ratings and the quality of paper they’re buying,” he says.
“Therefore there will be more demand for credit enhancements of one form or another.”
On a different subject, Ross says he hasn’t finished investing in financial firms.
“We made a major commitment to Assured Guaranty and the mortgage service industry,” he says.
“We expect to increase further our participation in the financial service sector.”
