Sell Side

WEB EXCLUSIVE: Buffett’s Insurer Wraps Its First Bonds

Warren Buffett’s new bond insurance firm, Berkshire Hathaway Assurance Corp., insured bonds for the first time on Tuesday, according to market sources.

Goldman, Sachs & Co. bought insurance in the secondary market on $10 million of bonds issued by New York City.

The news was first reported by Reuters, which said the bonds would mature in 2012 and the bank paid a premium of 26 basis points, though a market source disputed those numbers.

New York City office of management and budget spokesman Raymond Orlando declined to comment. Goldman spokesman Mike DuVally also would not comment.

Calls and e-mails to Ajit Jain, who Buffett has put in charge of the new insurer, were not immediately returned.

Several broker-dealers have been contacting Berkshire about the possibility of secondary market insurance, said one market source.

“There’s now an open dialogue between them and trading desks,” he said.

Buffett said late last month that he was starting up a financial guarantor to insure only municipal bonds, planning to avoid the structured finance markets that have created problems for the industry’s triple-A rated incumbents.

The new Berkshire guarantor has a license to operate in New York and has submitted applications in other states, including California and the Commonwealth of Puerto Rico.

Buffett has said he plans to put enough capital into his new insurer to make it triple-A rated, and several state and local government officials have said they want to use Berkshire’s bond insurance if it becomes available.

The Berkshire guarantor does not yet have any insurer financial strength ratings from the three major credit agencies, though Buffett has said his company is in an informal dialogue with the raters. Berkshire Hathaway Inc. has triple-A corporate ratings from all three agencies.

Market participants have speculated that Berkshire-backed bonds would trade more favorably in the market than those backed by other insurers.

“I just heard about it,” said B. Clark Stamper, portfolio manager at Stamper Capital & Investments Inc. “I don’t know where they are trading, but I’m sure they are trading richer than bonds that were not wrapped or by the other muni insurers other than maybe [Financial Security Assurance Inc.]”


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