     |
|
|
| |
|
|
|
Bond Insurance |
About Bond InsuranceIssuers that meet certain credit criteria can purchase municipal bond insurance policies from private companies. The insurance guarantees the payment of principal and interest on a bond issue if the issuer defaults. Bond ratings are based on the credit of the insurer rather than the underlying credit of the issuer. A municipal bond insurance policy may result in significant interest cost savings, depending upon the issuer's underlying credit and market conditions at the time of the bond sale. Interest cost savings are attributable to the higher bond rating as well as enhanced liquidity for insured bonds. Triple-A municipal bond insurance emerged in 1971. Since that time, the number of insured issues grew astronomically. In 1980, only 3% of bond issues were insured compared to approximately 60% in 2007. An estimated $2.5 trillion of bonds are presently outstanding of which more than half are insured. With growing popularity of insurance, the number of insurers also increased. AMBAC, the first insurer, was latter joined by other triple-A rated insures. In addition, insurance companies with claims paying ability lower than triple-A entered the market (Radian) to provide opportunities for insuring bond issues that were too small, unusual or had credit conditions that did not meet AAA insurers' criteria. Presently the Municipal Bond Insurers' credit ratings are under review due to subprime lending exposure. This exposure threatens the insurers claims paying ability and, for some insurers has or, in the future, may result in rating downgrades (see "Recent Events" below). In 2007 there were seven insurers rated triple-A by the three major rating agencies. Today only two insurers are triple-A rated by Moody's, Standard & Poor's and Fitch. Who Are The Bond Insurers The following are the websites for the major bond insurers and their current bond ratings:
Bond insurance is purchased through a one time payment of a premium at the time of the bond closing. Not all issues qualify for insurance. Each insurer has its own credit criteria, although the categories reviewed are essentially the same as those used by the rating agencies (see Bond Ratings). The process of insuring a new issue begins with the issuer submitting documentation for review (such as the official statement, financial statements and bond documents). If the issue qualifies for insurance, the policy may be purchased by "direct purchase" or "elective bidding". In a direct purchase, the issuer purchases the insurance policy directly from an insurer. Elective bidding allows bidders to choose whether or not to insure an issue at the time the bonds are competitively sold. In an elective bid, each bond dealer submitting a bid assesses whether the acquisition of insurance will result in a better bid. If the winning bidder submits a bid with insurance, the bidder pays for the insurance policy. RatingsThe ratings noted in the above table reflect the claims paying ability of the bond insurer. Insured bonds do not automatically receive these ratings. Generally, insurers do not recommend or require ratings from any particular rating agency. The issuer must determine which, if any, ratings it will purchase for the insured bonds. The issuer is also responsible for paying the rating fee to each rating agency that assigns ratings to the bond issue. While a bond issue may be insured by only one rating agency, if the insurer's rating is reduced by any rating agency, the market value of the bonds could be affected. Assessing Feasibility In a direct purchase, the issuer determines the feasibility of acquiring insurance. This requires an analysis of the projected interest cost differential for uninsured bonds compared to insured bonds. The interest cost savings should be more than sufficient to offset the cost of the insurance premium. Furthermore, since the premium is paid at the time of the bond closing and interest cost savings (if any) are realized over the term of the bonds, a present value analysis is the preferred approach for determining whether insurance results in cost savings. Role of WM Financial Strategies For your municipal bond issue, WM Financial Strategies will explore the feasibility of obtaining a municipal bond insurance policy. WM Financial Strategies begins with an analysis of your credit condition, the issue structure and current market trends. If, the acquisition of insurance appears to be feasible, WM Financial Strategies applies for a municipal bond insurance policy from one or more of the "AAA" insurers listed above. If the issue qualifies for insurance, a recommendation whether to buy insurance is made based on the analysis described above (see "Assessing Feasibility"). Recent EventsMoody's Investors Service, Standard & Poor's and Fitch have been reviewing bond insurers to determine their subprime exposure and whether their capital remains adequate to maintain their present ratings. See News and Commentary. The following is a list of recent credit rating actions relating to insurers that were AAA rated prior to December 2007:
More InformationVisit the Association of Financial Guaranty Insurers for additional information relating to municipal bond insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
WM Financial
Strategies |
