Sell Side

Assured Leads in 1st Quarter

With its role as the dominant bond insurer in the municipal market, Assured Guaranty Corp. upped its new-issue production by 31.6% in the first quarter of 2009.

Despite a Moody's Investors Service downgrade of its Aaa rating last November, Assured wrapped 434 new issues with a par value of $9.3 billion in the first quarter, compared to 203 issues with a par value of $6.8 billion in the first quarter of 2008, according to Thomson Reuters. It wrapped about 11% of all new issues, which compares favorably to the penetration rate the market's now-downgraded former leaders recorded at the market's peak.

Financial Security Assurance Inc., which Assured is set to acquire, ranked second as an insurer, wrapping 122 issues with a par value of $1.2 billion. That compared to the 508 issues with a par value of $14.6 billion it insured last year.

Berkshire Hathaway Assurance Corp., which has maintained a more limited role in the market, insured just four issues with a par value of $353.6 million. The company is being cautious about what it writes, regarding it as "far from a sure thing that this insurance will ultimately be profitable," chairman Warren Buffett wrote in a letter to shareholders earlier this year.

Assured - which in 2007 wrapped just $3.7 billion all year - has seen its market acceptance grow since the beginning of last year, executives said. Its average deal size, for instance, decreased in the first quarter of this year to $21.5 million from $33.8 million, representing its increased participation in the competitive market, which leads to a greater number of smaller deals.

Assured said it has increased its production while maintaining its underwriting standards. Eighty-nine percent of its new business in 2009 has been A-rated or higher, compared to 88% for the full year 2008.

"We're having a good year, we're off to a strong start," said senior managing director of public finance Bill Hogan. "We're looking for more of the same as we go through the rest of the year."

Retail investors in particular - who have recently played a bigger role in the market - still value insurance from the top-rated insurers, market participants say. In a recent report, Banc of America Securities-Merrill Lynch fixed-income strategist Philip Fischer wrote that bond insurance is "not going away."

For an A-rated school district general obligation bond, Assured Guaranty-insured paper could trade about 40 to 50 basis points tighter than an uninsured credit, estimates fixed-income strategist Guy LeBas of Janney Montgomery Scott LLC. For an A-rated revenue bond, Assured-insured paper could trade as much as 70 basis points tighter.

BHAC-insured credits have recently been lightly traded in the secondary market, but they would likely command about a 10 to 15 basis point premium to Assured, which is a bit narrower than in the past. BHAC recently lost its Moody's Aaa rating, although that is linked to a downgrade of an affiliate rather than concerns about BHAC itself.

FSA-backed paper trades at a slight discount to Assured, but the companies are linked by the pending merger.

Elsewhere, the use of letters of credit - which boomed last year as issuers converted their auction-rate debt to variable-rate securities - fell 29.5% in the first quarter of this year. This signals that refundings of ARS are nearing an end and results from the high rates LOC providers are charging, Fischer wrote.

LOC providers continue to quote high prices and ask for strict covenants, said Kaufman, Hall & Associates Inc. managing partner Kenneth Kaufman. In addition, issuers must consider the possibility an LOC provider gets downgraded.

This could push higher-rated issuers to forgo the variable-rate markets and issue fixed-rate debt.

"You've got a situation where it's not that easy to find LOCs," Kaufman said. "And when you do find it, you have to pay more for it, you have to give a lot more security, and then you have to take on quite a bit more risk of the situation."

In the letter of credit rankings, US Bank took the top spot, providing an LOC on 22 issues with a par value of $1.1 billion. Last year's number one, Bank of America-Merrill Lynch, fell to number two, providing just $892.8 million worth of LOCs in 2009 compared to $1.255 billion of LOCs in the first quarter of 2008. JPMorgan Chase placed third, backing 12 issues with a par value of $691.5 million in 2009, compared to 22 issues with a par value of $871.3 million in 2008.

In bond counsel rankings, Orrick, Herrington & Sutcliffe LLP took the top spot with equal credit given to each firm, working on 58 issues with a par value of $9.3 billion. Ronald E. Lee, attorney-at-law, ranked fourth with two issues with a par value of $3.3 billion, thanks to his work with Orrick on a $6.5 billion California GO deal.

On the trustee side, the Bank of New York Mellon again took the top spot, working on 186 issues with a par value of $17.4 billion.


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