Sell Side

FSA, Assured Buck Subprime Trend

With many bond insurers battling falling stock prices and doubts over their long-term financial stability, and with more state and local governments deciding to forgo insurance, two companies have positioned themselves to benefit from the ongoing subprime mortgage fallout. Financial Security Assurance and Assured Guaranty Corp. have seen their market shares boosted in the municipal market this month, even as the total share of insured deals has shrunk. Of the $20.5 billion total par sold during the first three weeks of November, about $8.8 billion was insured, according to Thomson Financial. All told, insurers have wrapped about 43% of the muni bonds sold so far this month. During November 2006, $20 billion of the $41.5 billion total monthly volume carried insurance — a 48.2% insured penetration rate. The decline in insurance use shows that municipal issuers and investors have begun to doubt the financial benefit of bond insurance in a market known for its credit stability and low default rates. The entire bond insurance industry has been affected, though in varying degrees. All three major credit rating agencies have said in recent weeks that they are reviewing the guarantors’ books to decide if the waves of structured-finance downgrades also merit dropping one or more of the insurers’ vaunted triple-A ratings. FSA and Assured were listed by Fitch Ratings and Moody’s Investors Service as two of the most insulated from subprime-related losses. “Their balance sheets right now are pretty pristine,” said Rob Haines, senior analyst at the research firm CreditSights. “They’re probably the only two names in the sector right now that are really going to be able to name their prices and subordination levels.” Bidding competition between the firms typically known as the market’s four busiest — Ambac Assurance Corp., Financial Guaranty Insurance Corp., FSA, and MBIA Insurance Corp. — has changed, municipal underwriters say.

“For the most part, underwriters would pick one of those top four guys based on price,” said Greg Finn, executive vice president at Roosevelt & Cross Inc. “A matter of pennies per bond would determine who got chosen.” The underwriters said it is not uncommon now to see issuers choose FSA for insurance even when the guarantor does not offer the lowest bid — something that would have raised eyebrows before the current credit crisis began. FSA backed 30.8% of the bonds sold during the first three weeks of November, up from a 26.9% market share during November 2006, according to Thomson. Assured won less than 1% of the total insured-bond business last November, but the company has backed 8% of the deals sold so far this month. “Assured, even though it has the clean bill of health, doesn’t have the name recognition that FSA does,” Finn said. FSA has declined to comment on their new market advantage, saying only that they are “being recognized for our historic conservatism.” Assured received its third triple-A rating from Moody’s in July and has written the majority of its new business in structured-finance markets in the past because that was a place the company could gain acceptance while it underwent the longer ramp-up period necessary to gain acceptance in the muni market. During the third quarter, Assured Guaranty Ltd., the bond insurer’s parent company, wrote $77 million of new business in U.S. structured-finance markets and $10.3 million in U.S. public finance markets. The company measures its new business in terms of the present value of gross written premiums.
But while many of its competitors’ structured-finance divisions have backed collateralized debt obligations and other structures with underlying subprime mortgage loans, Assured’s structured-finance business has been in more “plain-vanilla” assets, such as seasoned credit-card and accounts-receiveable securities, Haines said. Assured has seen its public finance deal flow increase following the vote of confidence from the rating agencies, said Bill Hogan, a public finance managing director at Assured. Thomson data showed that Assured has backed $702.6 million of bonds this month, up from just $96 million last November and making it the fourth-busiest bond insurer this month. “We haven’t been shy about letting people know — investors and bankers — about some of the independent research that’s out there,” Hogan said. Financial Guaranty Insurance Corp. has seen its public finance business hit the hardest, as it was listed by Fitch and Moody’s as one of the most likely to face a ratings action upon further review. Thomson data showed that FGIC backed $3.8 billion of municipal bonds last November — 18.8% of all bonds insured that month — but has been chosen this month to insure just $659 million — 7.1% of the bonds sold. CIFG NA, the triple-A insurer that Fitch and Moody’s labeled as having one of the worst chances of facing a downgrade, announced a $1.5 billion capital injection last week. The two rating agencies affirmed their ratings of CIFG, and Standard & Poor’s said yesterday that the extra capital would likely not affect its AAA rating nor its negative outlook on the company. Before their announcement at the end of last week, CIFG had insured $25.4 million of bonds during November — about 0.3% of all the bonds insured. During the same month of 2006, the insurer had a 3% market share with $590.3 million of bonds insured.


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