Sell Side

Assured All Alone On Top

The first-quarter rankings for bond insurers present a mixed story for Assured Guaranty Ltd., the unrivaled titan in the market. Through its two insurer subsidiaries, the company commanded 100% of the sector where $6.5 billion in debt was insured in the first quarter, according to Thomson Reuters.

Assured Guaranty Municipal Corp., which is only active in the municipal market, backed 229 issues totaling $5.11 billion in the quarter. Assured Guaranty Corp., the portfolio of which also includes structured finance products, insured 127 muni issues worth $1.440 billion.

Together they guaranteed 6.3% of the $103.73 billion that came to market. In all of 2009, the insurers backed 8.5% of total borrowing.

The two insurers’ quarterly volume was 20.5% greater than the $5.16 billion insured in the fourth quarter of 2009, but it’s also a 40.2% drop from the $10.95 billion insured in the first quarter of 2009.

A similar market share allowed the parent company to pull off record profits in each of the past two years, but as the muni market learns to function largely without insurance, the extent to which Assured can expand its footprint remains questionable, market participants noted.

“I think the availability of just having one insurer presents an issue in itself in terms of diversification,” said Phil Villaluz, municipal strategist at Advisors Asset Management. “From a buy-side standpoint, you typically want to have more than one insurer in your book.”

Warren Buffett’s Berkshire Hathaway Assurance Corp. is the only other insurer with high enough ratings to be active in the market, but it chose not to back any deals in the quarter. However, recent data indicates that it did insure two deals worth $50.9 million last November.

Without more competition, the insured market share certainly won’t return to the 50% levels routinely seen before the credit crisis, Villaluz said, but there will continue to be some demand for credit enhancement, particularly among lower-grade issuers and those that are less active in the market.

“If they can manage to maintain at least 10% market penetration, which may entail revising underwriting standards to include more issuers further down the credit spectrum, such as low single-A or even triple-B quality credits, that’s where I think future relevance could reside,” he added.

The prospects for a recovery could also be limited further as Fitch Ratings and Moody’s Investors Service both “recalibrate” their ratings to a global scale, a move that is already pushing up municipal grades across the board due to historically low default rates.

Other forms of credit enhancement are suffering even more, at least by volume.

Letters of credit — which provide a guarantee of payment, usually from a commercial bank — shrank by 73% in the first quarter compared to the prior three months. LOC volume was $1.73 billion overall from January to March, a pittance compared to the $22.8 billion utilized in all of 2009, or the $71.8 billion in 2008.

JPMorgan provided 43.7% of all LOCs, in terms of volume, and Bank of American Merrill Lynch provided 23.1%.

In lieu of private credit enhancement, the use of other guarantee providers, largely state-supported programs, has been rising. Volume in the category was $3.69 billion in the first quarter, reflecting a 82% increase from the prior quarter and a 110% advance from the early months of 2009.

But such guarantees are far from replacing private enhancements. The most active alternative provider was the Texas Permanent School Fund, which guaranteed 62 issues worth $912 million in the quarter.

In the prior quarter it was not active because it was awaiting a ruling from the Internal Revenue Service, received in December, before it could resume activity.

In rankings for bond counsel, Orrick Herrington & Sutcliffe LLP is on a clear path to be the most active firm for the eighth straight year.

The firm was bond counsel on 15.6% of all volume last quarter, reflecting a greater market share than the next top three firms combined.

When all firms are awarded equal credit on deals, Orrick is credited with 102 issues totaling $16.1 billion, a 74.2% gain compared to first-quarter business in 2009.

Orrick’s hegemony in bond counsel isn’t a fresh headline, however. In the final quarter of last year the firm controlled 16.2% of the share on $19.5 billion worth of deals.

“Our bond counsel activity is very broad-based — East Coast, West Coast, all over,” said Robert Feyer, a partner in the San Francisco office.

Orrick was sole bond counsel and co-disclosure counsel on the two California deals in March which were worth $5.9 billion. That had a clear impact on the rankings, as Orrick garnered the top spot in both categories.

“But even if you took those out, we’d still be in first place by a very large margin,” Feyer added.

In second spot for bond counsel was Squire Sanders & Dempsey LLP, which moved up from ranking 21st in the previous quarter. The firm took equal credit on 48 issues totaling $5.2 billion.

Hawkins Delafield & Wood LLP was third overall among bond counsel, dropping one spot from the second place it held for the past five years.

Compared to the same period a year earlier however, Hawkins worked on 13.5% more bond volume with 67 deals worth $4.5 billion.

Among underwriter’s counsel, Sidley Austin LLP moved up from third in 2009 to become first in early 2010 with an 8.3% market share.

Sidley opined on 11 deals worth $6.5 billion, two of which were the mammoth California issues in late March.

Orrick also ranked first on negotiated sales, while for competitive deals, Seattle-based Foster Pepper PLCC maintained its first-place ranking..

Bond trustee rankings were relatively stable. Bank of New York Mellon remained in top place with $20.5 billion of debt on 203 issues for a market share of 40.3%, when trustees are ranked by principal amount. U.S. Bank NA and Wells Fargo continue to rank second and third, respectively, working on deals worth $12.7 billion and $8.89 billion.


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