Sell Side

MIAC Gets N.Y.'s OK To Become Guarantor

The Municipal Infrastructure and Assurance Corp. came one step closer to insuring municipal bonds by gaining approval from the New York Insurance Department to act as a financial guarantor.

As a well-capitalized addition to the beleaguered bond insurance industry, the new venture - co-sponsored by Macquarie Group and Citadel Investment Group - could help drive down costs for municipal issuers once it enters the market, MIAC executive vice chairman Richard Kolman said in an interview.

"At the end of the day, this is about lowering cost of funds," he said. "It's a difficult time in the municipal sector, and we're going to be here to help tighten those credit spreads which have widened substantially."

Insurance superintendent Eric Dinallo said the company - which will only insure municipal and infrastructure credits - will be a welcome addition to the market.

"Especially in today's turbulent credit market, any option that helps municipalities throughout New York and the nation save taxpayers money is welcome," Dinallo said in a statement. "Municipal bonds help build our bridges and our schools. MIAC's entry helps keep the bond insurance market vibrant and competitive, and that helps our cities and towns lower the cost of issuing bonds."

MIAC has started discussions with all three rating agencies and is working with the National Association of Insurance Commissioners to receive a license in all 50 states. It hopes to finish the process by the end of the year.

It says its capitalization will substantially exceed the rating agencies' triple-A requirements and will stand at multiples above statutory levels. In addition to co-sponsors Macquarie and Citadel - both minority shareholders - a number of still undisclosed global pension funds, insurance companies, and financial institutions have invested in the firm.

MIAC will look to insure a wide-range of municipal and infrastructure credits across the country, from large state general obligation offerings to issues from small school districts, Kolman said. It will focus on the primary market and will never write structured finance products.

Downgrades to bond insurers exposed to the U.S. housing market through structured finance products have helped cause insurance penetration to plummet. Demand fell as investors shunned the formerly triple-A insurers, while the available supply of bond insurance contracted. As issuers have converted out of auction-rate securities, they have often turned to other forms of credit enhancement such as letters of credit, a more costly alternative with limited supply.

MIAC expects it will offer a much-needed alternative in the market, Kolman said. Insurance penetration has fallen to around 10% of the market in recent months, but the new company believes it could increase to about 30% to 35%, enough for the books of three or four firms. MIAC hopes to attract about 20% to 25% of the insurance market, which could reach as high as a 50% penetration rate by 2010, Kolman said.

George Friedlander, managing director and fixed-income strategist at Citi, said a new bond insurer is "desperately needed" in the market to relieve issuers from historically high short- and long-term yields.

"There is a need for a new bond insurer with no history of housing-related problems," Friedlander said.

The spread between the yields of single-A and Berkshire Hathaway Assurance Corp.-guaranteed triple-A bonds is at a "historic high," he said, and a new insurer would provide diversity for the market. Investors remain uncomfortable with Assured Guaranty Corp. and Financial Security Assurance Inc. - both still on review for downgrade by Moody's Investors Service - and Berkshire is a "limited resource," Friedlander said.

For issuers, an additional insurer could help lower the costs of funds as credit spreads have widened amid the broader credit crisis, Kolman said. Insurers have also had the opportunity to charge historically high premiums due to the lack of competition, according to a recent Standard & Poor's report.

For investors, MIAC insurance will provide bonds with better price protection, liquidity and on going credit surveillance, Kolman said.

MIAC joins Warren Buffett's Berkshire Hathaway Assurance as the second insurer to enter the municipal market this year. Participants said it's good for the munis that companies still believe bond insurance is a viable business.

"If the premium is at a level were you're not adversely effecting the overall cost of capital, and the premium is reasonable in comparison to present value savings of using bond insurance, then the water's fine, come on in, the more the better," said J. Chester Johnson, chairman of Government Finance Associates Inc. "I think anyone in the market who has been around for a while would encourage high-quality institutions to look at the municipal market and to consider the advantages of bond insurance as a long-term business."

Although a new triple-A insurer would certainly be welcome in the market, some said MIAC will have to still have prove its strength. Berkshire Hathaway and Buffett benefited from their previous reputation, but it remains unclear how investors will react to MIAC or any other new entrants given the mass downgrades of insurers last year, said Dick Larkin, senior vice president, and director of research and Herbert J. Sims & Co.

Investors will likely need some time to adjust to a new name in the market, according to John Mousseau, vice president and portfolio manager at Cumberland Advisors.

"All the firms have recognized internally their credit work needs to be more thorough from a retail sales standpoint, and I don't think that changes with another insurer in the market," Mousseau said. "I think these guys are going to be looking under the hood, so if you bring a [MIAC] issue with a very cheap underlying rating, it's going to be a while before you see people pay up for that. But that's the evolution of entry into a good business; I have no doubt that the first ones they insure will probably be pretty good buys relative to stuff down the road."

The office of California Treasurer Bill Lockyer - which has also criticized rating agencies - says it's unlikely to do business with any new bond insurer. California ranks as the third largest issuer of insured paper since 2004, according to Thomson Reuters.

"We won't be interested in doing business with them," said Lockyer spokesman TomDresslar. An insurer would need to keep its triple-A rating "for 30 years" or agree to refund the issuer if the bond insurer loses its triple-A rating before it got business, he said.

MIAC will benefit from having a number of public finance veterans as part of its management team. Kolman worked for Goldman, Sachs & Co. for 25 years, including as co-head of its municipal bond department, and also has served on a number of industry boards. MIAC chief executive officer Thomas Randazzo most recently headed the public finance division of XL Capital Assurance Inc., now Syncora Guarantee Inc.

Other executives with financial guaranty experience include chief underwriter Michael Linko, chief risk officer Adam Bergonzi, and chief administrative officer John Calvao. In addition, former Macquarie Capital (USA) Inc. senior vice president Randy Vivona will serve as managing director of treasury and tax.

"We want a return, but our objective is to really help the marketplace," Kolman said. "After being at Goldman for 25 years and loving municipal bonds, clearly my heart is toward that."


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