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NLC-Led Insurer Plan Gets Boost

WASHINGTON - Members of a National League of Cities-led commission are optimistic about the possibility of moving forward with the creation of a nonprofit, national mutual credit-enhancement company after meeting this week with rating analysts and the staff of the New York State insurance superintendent.

Commission members, which include representatives of the National Association of Counties, plan to develop a detailed business plan for the proposal during the coming weeks if they can get approval from the NLC and NACo boards.

The two groups also plan to court key lawmakers in Congress and officials in the Obama administration to get their support for a federal contribution that would go towards the initial capitalization of the credit enhancement company.

Specifically, the group may need a total of about $1 billion to $1.5 billion, of which a significant portion would come from the federal government. The exact amount of the federal contribution will depend on the types of debt the credit enhancer insures and its overall capacity, said Bob Inzer, chairman of the NLC panel and clerk of the court for Leon County, Fla.

In an interview yesterday, Inzer said that the $1.5 billion figure is an "amazingly low figure" considering the widespread assistance it could provide to municipal governments.

"It's a fairly small investment that could provide a lot of relief to cities and counties across the country," he said.

A mutual insurance company is needed, he added, because many local governments are either paying a high premium to access the municipal market or are being denied access to it completely.

"We're the industry, if you will, that is struggling, so we're the right people to take this into our own hands to solve this problem," Inzer said.

The new credit enhancer would be structured to shield its business from political considerations, possibly by prohibiting its board of directors from playing any role in individual policies, he said.

Inzer characterized his meeting with officials at rating agencies and New York insurance superintendent Eric Dinallo's office as productive.

"There's nothing that they told us that would have precluded us from going forward," he said, adding that he also has approached state pension funds about investing in such a company and that they, too, were generally supportive.

The visit to Dinallo's office comes as the state regulator has sought to draw new sources of capital from both public and private sources into the bond insurance business.

Dinallo's staff were "intrigued" by the concept of a mutual insurer and considered Monday's meeting "very productive," said deputy superintendent for rates and competition Hampton Finer.

"From an overall public policy perspective, there is obviously some need in the marketplace for sort of clean, greenfield insurance capacity," Finer said, noting the department walked the group through the steps of obtaining a license. "If the capital is there, we would be excited about licensing a new company, especially one with a broad support for new issuers."

The Insurance Department last year licensed two for-profit bond insurers, Berkshire Hathaway Assurance Corp. and the Municipal and Infrastructure Assurance Corp., the latter of which has not yet started to write new business.

Meanwhile, a spokesman for Standard & Poor's said that the rating agency does not comment on meetings it has with issuers or potential issuers.

But Richard Smith, managing director in the bond insurance rating group at Standard & Poor's, noted in a statement that the agency released a commentary last September that discusses how it views the business prospects of bond insurers, including possible new entrants to the industry.

"Our views since then have not changed," Smith said. He added that a necessary condition for the future success of a bond insurer - whether it be an existing company or new entrant - will be for investors to regain confidence and trust in the product as well as the individual companies.

"At this time, it remains unclear to us to what extent this will in fact occur," he said. "Our ultimate view of any particular start-up will depend in large part on whether we believe management can put together a sustainable business model and demonstrate the ability to generate a profitable stream of revenue that is of sufficient volume and quality to support the capital employed in the business. Furthermore, we believe assembling a top-notch management team with strong enterprise risk management capabilities will be critical to achieving high credit ratings."

A spokesman for Moody's Investors Service said the agency could not comment on issuers it does not rate.

A Fitch Ratings spokesman did not return telephone calls for comment.

The proposal for the creation of a mutual credit enhancement company comes after downgrades to bond insurers has caused problems for many issuers. Insurance penetration fell to 18.4% from 48% with fewer top-rated insurers in the market, according to Thomson Reuters.

Historically, a significant number of investors who consider buying muni bonds relied solely on the rating on the bond insurer that wrapped the municipal credit. Without insurance, issuers, particularly municipalities and school districts with underlying ratings below double-A, have been forced to pay a much higher premium to attract investors, Inzer said.

To examine the impact the insurers' downgrades were having on the municipal market, the NLC convened a 17-member blue-ribbon commission last October. In a report released in mid-January, the panel called for a study to focus on the prospects of creating a mutual insurance company that would back fixed-rate debt, including general obligation bonds and revenue bonds for essential government services.

The report said that the money to fund such an insurance effort could come from state pension funds, a reserve fund paid into by borrowers that use the program, and - most critically - the federal government.

Assuming the federal government is supportive, Inzer said he hopes that the mutual credit enhancement company can get off the ground by as early as this summer.

"The answer to when is ASAP, if not sooner," he said. "This will not happen without some level of federal support and involvement. As soon as we know the federal government is a participant and wants this to happen, all of the pieces will fall in place very quickly."

Once the company is up and running, Inzer said, it may be able to expand its services by partnering with state pension funds and banks to provide liquidity support for short-term variable-rate products, he said. It would do this partly by leveraging the large pools of capital managed by state pension funds.

The NLC is not the only market participant pushing for a federally supported insurer. In letters sent this week to House Financial Services Committee chairman Barney Frank, D-Mass., and Senate Banking Committee chairman Christopher Dodd, D-Conn., the Securities Industry and Financial Markets Association said it supports such an entity.

Leslie Norwood, SIFMA's managing director and associate general counsel, said yesterday that "while SIFMA hasn't seen the details of the NLC proposal, we do support initiatives that return the flow of liquidity to our markets and provide access points for issuers."

Meanwhile, Frank said at a press conference Tuesday that he plans to push for a federal insurance program to back munis, now that the ratings of most bond insurers have deteriorated. He also said federal funds could be safely deployed to insure tax-exempt paper because municipal debt rarely, if ever, defaults.

"If you were to insure bonds issued by these municipalities, with some limitations, and you had the federal government be paid by their insurance premiums ... it would cost the federal government zero ... and it would substantially reduce the interest payments" that municipalities are paying now, Frank said.

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