Bond Insurers

Another Insurer Steps Up

To the list of aspirants fighting to break into the bond insurance market, add one more name: BondModel Co., a New York-based outfit founded by former Goldman, Sachs & Co. public finance people.

George H. Butcher 3d planted the seeds of BondModel nearly a decade ago when he filed an application with the U.S. Patent and Trademark Office while still a managing director at Goldman.

The application and subsequent filings sought to patent a method of structuring pools of municipal bonds in such a way that could make insuring them less expensive.

The patent was granted in June 2008. BondModel, which now has the rights to the patent, said it is working with regulators and rating agencies to obtain ratings and approvals and begin insuring deals.

In a statement, Butcher said the company is “guardedly optimistic” it will begin writing business early next year.

BondModel consists of six people. Butcher is chairman and his former Goldman colleague Bradley W. Wendt, who after leaving Goldman co-founded BondDesk Group, is president.

The company yesterday announced it hired John Pizzarelli, formerly of MBIA Inc., CIFG, and Lehman Brothers, as chief operating officer.

The structure BondModel is proposing, outlined in the patent, works like this: BondModel creates a structure with a certain number of pools. It populates each pool with a tranche of insured municipal bonds and a tranche of uninsured munis.

The company sells two positions in each pool, a senior position entitled to the insured tranche and a junior position entitled to the uninsured tranche.

If the insured tranche in a given pool defaults, BondModel would intercept the payments from the junior portion to repay the senior portion.

If the junior portion in that pool is not enough to compensate the senior tranche, then BondModel would intercept payments from the junior portions in other pools to repay the senior portion in the pool with the default.

That way, all the senior tranches are senior to all the junior tranches. No uninsured bondholder in the structure would be paid until all the insured bondholders were paid first.

BondModel claims it is cheaper to insure bonds this way because the uninsured tranches provide credit support to the insured tranches, in addition to the insurance itself.

The company estimates it only needs one-sixth the capital that a traditional bond insurer needs to insure the same amount of principal.

The upshot is BondModel thinks it can insure municipal bonds by using less leverage and less cash than traditional bond insurers.

Other than lighter capital requirements, the model offers some clear distinctions from bond insurance as the market knows it now.

Bond insurers typically collect a portion of a deal’s principal up-front in exchange for a pledge to cover any missed payments over the life of the bond. That means that for every new deal a bond insurer writes, its need for capital increases.

Under the proposed model, new deals could actually decrease the capital requirements because much new credit enhancement is coming from the uninsured bonds in the structures.

The bond insurance industry is wide open right now. Assured and FSA, which operate under the same parent company, are the only carriers writing new business. They combined to insure 9.6% of the municipal bonds issued in the third quarter.

To put that into perspective, before the credit crisis sent the industry into convulsions more than half of the municipals issued in a given quarter were usually insured.

Numerous companies are trying to break into the market, some old and some new.

MBIA Inc., through its public finance guarantor subsidiary National Public Finance Guarantee Corp., is awaiting the outcome of litigation and hopes to begin writing business again if it prevails.

Municipal and Infrastructure Assurance Corp., the brainchild of Macquarie Group and Citadel Investment, is a startup awaiting ratings.

HRF Associates and the National League of Cities have independently proposed bond insurers owned by municipalities.

Pizzarelli said after leading CIFG’s restructuring in January he began thinking of ways to jump back into the business.

None of the other ideas he looked at had the “punch” Pizzarelli was looking for, he said, until he contacted Wendt.

“I talked to Brad one night, and he said, 'I’m working with a bunch of smart people from Goldman and some other companies on this platform, would you like to come talk to us?’ ” Pizzarelli recalled. “It took me about a day or a day and a half to realize that this was the best idea in the ­market.”


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