In raising more cash to placate the rating agencies, Assured Guaranty Ltd. also pleased bondholders.
Since the Bermuda-based bond insurer raised more capital than expected earlier this month, yields on some of the municipal bonds it insures have tumbled.
George Friedlander, municipal strategist at Morgan Stanley Smith Barney, said yields on bonds insured by Assured’s two operating subsidiaries, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., have slipped 35 to 40 basis points in recent weeks.
“This sector appears to have been supported by the successful capital-raising financing accomplished by Assured Guaranty,” Friedlander said.
Moody’s Investors Service last month downgraded the financial strength rating of Assured Guaranty Corp., one of Assured’s two main operating companies.
Assured said it planned to raise $300 million to bolster its capital strength and mollify the rating agency. The company ended up raising $574 million in a stock sale run by UBS Securities.
Assured’s credit-default swap spreads, which measure the perceived likelihood of the company defaulting, shrank significantly after the deal, according to Bloomberg LP.
A small chance of default implies bonds insured by Assured are safer and more valuable.
A quick look at some of the biggest deals Assured insured last quarter confirms the rally in the company’s insured paper.
The biggest deal wrapped by Assured in the third quarter was a $563.8 million bond issued by the Indianapolis Local Public Improvement Bond Bank, mostly to refinance debt floated for a waterworks project.
The day before Assured’s announcement, this bond traded at a yield of 4.97%, according to the Municipal Securities Rulemaking Board.
A day after the announcement, the same bond traded at a yield of 4.5%, representing price appreciation of 3.4%.
The next-biggest insured deal was the North Carolina Turnpike Authority’s $270.1 million revenue bond sale in part to finance the Triangle Expressway, an 18.8-mile toll road in Durham and Wake Counties.
Yields on this bond sank to 5.09% from 5.69% after Assured’s capital-raising announcement, representing price appreciation of 4.3%.
Based on the triple-A 30-year Municipal Market Data scale, the market rallied 10 basis points during that time.
