Bond Insurers

Macquarie Backs Out Of MIAC

After a two-year struggle to launch Municipal and Infrastructure Assurance Corp., a muni-only bond guarantor, key investor Macquarie Group is exiting the bond insurance business or selling its stake.

A source familiar with the start-up bond insurer said Macquarie, an Australian investment firm, has been unable to find fresh capital since co-sponsor Citadel LLC, the Chicago-based hedge fund, dropped out nearly a year ago.

Macquarie still believes in the product but it is unwilling to push ahead without a co-sponsor, the source said, adding that no final decision about MIAC’s future has been made.

A source within Macquarie confirmed that MIAC’s future is bleak.

“Launching a monoline insurance business requires the participation of a broad consortium of investors with sufficient resources,” the Macquarie source said. “In light of the challenging market conditions and lack of attractive investment partners, Macquarie is understood to be pursuing various options for the MIAC business, including an exit or sale of the business.”

Steven Yan, vice president of corporate communications at Macquarie, declined to comment and said “no official statement” on the matter has been released.

Phone calls to MIAC were unanswered, some phone lines at its midtown Manhattan office were disconnected, and e-mails to multiple people within the organization were not returned. Its website has been “under construction” throughout 2010.

Thomas Randazzo, formerly MIAC’s president, declined to comment but said he is no longer affiliated with the company.

Ronald Klug, a spokesman at the New York Insurance Department, MIAC’s regulator, offered no comment on the company’s status beyond saying the insurer was currently solvent and authorized to be an insurer.

MIAC has never publicly disclosed its ratings. A spokesman from Moody’s Investors Service said Tuesday that his agency does not have a rating for the company, while a Standard & Poor’s analyst had no update on MIAC since late 2009. Fitch Ratings said Monday it “does not maintain ratings on any monoline ­insurers.”

When MIAC first received approval from the NYID to operate, it held $75 million in cash assets, had zero liabilities, and looked as though it would enter the market swinging.

The insurer’s licensing process was expedited for all 50 states, it was staffed by a team led by Goldman, Sachs & Co. ­veteran Richard Kolman, and it claimed it would be capitalized at “multiples above” the minimum statutory level.

“MIAC expects to be a multi-billion dollar company in the first years after launch,” stated a corporate fact sheet published in September 2009. Its plan was to “reset” the bond insurance business by only insuring public finance deals, avoiding any exposure to structured finance, and restoring the market’s acceptance of financial guaranty insurance.

But Citadel, which in 2008 experienced its worst year since its 1990 inception, told investors in early 2009 that it was refocusing its efforts on fundamental investments and moving away from any operations — including any insurance or reinsurance — that would constrain its balance sheet.

Citadel withdrew all its support by the end of last year. It was a top-down decision, a source familiar with the hedge fund said, adding that it had nothing to do with MIAC specifically. The company remained confident it could find fresh capital. In late December 2009, Kolman said the insurer had received financial strength ratings from at least one rating agency, and he hoped the company would enter the market within a few months.

But while Macquarie continued looking for a co-sponsor, the imminent need for a return of bond enhancement waned as the market learned to live in a post-insurance world. Banks stepped up credit analysis, rating agencies recalibrated munis to a global ratings scale, and a flight from equities helped lower municipal borrowing costs to some of the lowest on record.

Assured Guaranty Ltd., the only guarantor still writing new policies, wrapped $20.6 billion of debt, or 7% of new issuance, in the first nine months of this year. Before the financial crisis, more than half of new issuance was routinely insured, according to Thomson Reuters.

Dominic Frederico, Assured’s chief executive officer, recently said bond insurance would be more widespread if there were more competition. But he called the landscape for start-up insurers “incredibly hilly,” adding that it was “hard to envision” there would be many new entrants given the capital requirements and need for high, stable ratings.

Matt Fabian, managing director at Municipal Market Advisors, said the decline of bond insurance penetration makes it a difficult trade for an equity investor. “It’s an incredibly complex structure to invest in, even when times are good,” he said.

The prospects for MIAC deteriorated in May when Kolman announced he was departing after 18 months to launch a muni underwriting business for U.S. Bancorp.

A spokesman for MIAC at the time said Kolman’s departure would have no bearing on whether the company would move forward, but in the months that followed there were no developments in hiring new talent. Meanwhile, the flash-crash on May 6 — in which the Dow Jones industrial average swung more than 1,000 points in a matter of minutes — reinforced fears that equity markets remain risky and may have hurt the company from finding capital.

Fabian said the problems of raising capital and attaining ratings have hindered the resurgence of bond insurance, rather than changes in market sentiment.

“The bond insurance problem is a supply, not a demand, problem,” he said. “It’s the firms’ inability to provide insurance rather than the lack of demand for it.”

Institutions have had less appetite for bond insurance because they have the resources to understand the underlying credits, but individual investors — who make up more than one-third of the muni ownership base — still prefer to have a second set of eyes on their bonds, Fabian said.

“There are these individual investors and small money managers who have a real difficulty trading this market without insurance,” he said. “Trying to value bonds is immensely complex for them.”

Kolman, who on Tuesday declined to comment on MIAC’s present state, also said there is continued demand for more insurance choices.

“It’s still a market that has more than 11,000 issuers, and there’s probably a subset of issuers that do need credit enhancement,” he said. “You can’t just have one player. There’s clearly still a need. Maybe somebody else will step in.”


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