Sell Side

Assured Leads Insurers

Assured Guaranty Ltd. continued to dominate bond insurance in the first half of 2010 even as the industry struggled to re-establish itself as an important force in the municipal market, data from Thomson Reuters shows.

In the years leading up to the credit crisis it was routine for more than half of all new issues to be wrapped by one of the nine bond insurers competing in the market. Since the second half of 2008, less than 10% of new volume has been guaranteed by just two insurers.

It has been more than two years since June 2008 when Standard & Poor’s initiated a series of downgrades by stripping market leaders MBIA Insurance Corp. and Ambac Assurance Corp. of their AAA ratings.

Since then, nearly all bond insurers have been forced to stop writing new business. Exposure to mortgage-related debt prompted the rating agencies to downgrade them below investment grade.

Assured Guaranty Corp. and Financial Security Assurance — which was acquired one year ago and renamed Assured Guaranty Municipal Corp.— are the only guarantors that have maintained double-A ratings or higher. Both insurers are rated AAA by Standard & Poor’s and Aa3 by Moody’s Investors Service, with negative outlooks.

A comparison to the first half of 2007 illustrates the depth and breadth of the market’s change.

Three years ago, 48.6% of new volume, or $112.4 billion of bonds, was insured from January to June. In the last six months, only 6.7% of new volume, or $13.6 billion of bonds, came to market insured.

AGM, which only wraps municipal bonds, guaranteed 568 issues worth $10.8 billion, or nearly four-fifths of all insured bonds. AGC, a diversified platform that continues to wrap structured finance products as well as munis, backed 246 issues totaling $2.8 billion.

Warren Buffett’s Berkshire Hathaway Assurance Corp. is the only other insurer with high enough ratings to be active in the market. The company was established in early 2008 and was originally quite active, but has done virtually no business since the second quarter of 2009.

Buffett, who reiterated in June that there would be trouble ahead for the municipal market, has said the company is unable to get the pricing it wants for insuring munis. In his annual letter to shareholders in February 2009, he said guaranteeing tax-exempts “has the look today of a dangerous business — one with similarities, in fact, to the insuring of natural catastrophes.”

Assured Guaranty is more optimistic. It recently started a marketing campaign with radio and print ads highlighting the value of insurance in uncertain times, and has succeeded in insuring some major deals this year. They include a $425 million issue from Arizona and a $355 million deal from the Dormitory Authority of the State of New York. Both were issued in May.

The bond insurance market is widely anticipated to perform better if other private insurers are able to emerge on the scene with high ratings. For now, issuers are increasingly reliant on other forms of insurance such as state guarantee programs.

Almost $8.2 billion of bonds were wrapped by such programs in the first two quarters, which more than doubles the volume from the same period last year. Two programs were particularly active: the Permanent School Fund of Texas wrapped $1.9 billion of debt, while Pennsylvania’s Higher Education Agency guaranteed $1.6 billion.

While those programs are booming, letters of credit — which are usually issued by commercial banks to provide a guarantee of payment on debt with a maturity shorter than five years — remain insignificant.

In the past six months only 94 LOCs totaling $4.2 billion were issued, compared with 261 issues worth $11.3 billion during the same period of 2009. Two issuers, JPMorgan and Bank of America Merrill Lynch, were responsible for 55.6% of all deals this year.

In January to June rankings for bond counsel, Orrick Herrington & Sutcliffe LLP absorbed 12% of the industry’s business based on calculations giving equal credit to each firm. The firm opined on 208 issues totaling $24.3 billion with the majority of that volume — $16.1 billion — being completed in the first quarter. Orrick has been top bond counsel for the past seven years.

“We are continuing to do well for the same reasons that we have been in the immediate past,” said Roger Davis, Orrick’s head of public finance. “We have a national platform that’s spread across all areas of public finance. In times of uncertainty — and new developments and new products — clients tend to turn to firms like ours, which are deeply experienced and broadly involved in the market.”

Hawkins Delafield & Wood LLP, which placed third in the first quarter, regained the number two spot it has held for the last five years. It worked on 156 issues totaling $11 billion in the first six months of the year.

Nixon Peabody, the sixth-largest bond counsel last year, moved up to rank third in the first two quarters. It worked on 32 issues totaling $8.9 billion, representing a 53.5% increase in volume compared to the same period last year.

Nixon Peabody also moved up a spot from 2009 to place first among underwriter’s counsel. It worked on 27 issues worth $8.6 billion from January to June, just beating Sidley Austin LLP, which completed 23 issues worth $8.5 billion. Both firms had a 5.6% market share.

Among disclosure counsel, Orrick captured 27.6% of deals in the first half of the year — a bigger share than the next top four firms combined. It worked on 84 issues totaling $13.8 billion, compared with the 49 issues worth $12.7 billion which it completed in the same period one year ago.

Rankings for bond trustees were relatively unchanged. Bank of New York Mellon took the top place with $44.9 billion of debt on 498 issues for a market share of 41.8%, 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 $31.3 billion and $15.6 billion.


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