Sell Side

BAM! Municipal World Responds Positively to Build America Mutual

Most municipal market participants welcome bond insurer startup Build America Mutual Assurance Co.

“I think there is absolutely a place for a strongly rated monoline bond insurer in the muni world,” said Dave Thompson, chief executive officer of Phoenix Advisors.

Standard & Poor’s awarded a AA rating to BAM. The only other active bond insurer is Assured Guaranty, which has a AA-minus rating from S&P and a Aa3 rating that is on review for a possible downgrade from Moody’s Investors Service.

“I think it’s great to have another competitor in the market,” said Jack Addams, head of public finance at First Southwest. Referring to BAM’s leadership, Addams said “they have a lot of experience.”

BAM has lured several executives away from Assured.

Many solid BBB and weak A- rated issuers could benefit from BAM, Thompson said.

“We believe [BAM] will have very strong market penetration,” Standard & Poor’s primary credit analyst Marc Cohen wrote in explaining the AA rating. “We view BAM’s competitive position as supported by very strong market acceptance [of another bond insurer], a relatively low-risk profile given its designated target market in public finance, and the strong and relevant experience of senior management.”

“We expect the market for insured public finance issues to grow, particularly for smaller and less-frequent issuers,” wrote Standard & Poor’s spokesman Olayinka Fadahunsi, summarizing an S&P report on the bond insurance industry.

BAM will initially insure bond issues no larger than $100 million.

“If this new bond-wrapper actually comes into the market and makes a difference of any significance, I think you’d start to see the whole insured portion of the market get pulled higher with it,” a New York trader said.

If there is another credit enhancer it will make it clearer to bond issuers that insurance is valuable, according to John Mousseau, managing director of Cumberland Advisors. In this way BAM’s start is good for Assured, he said.

“The entry of a new financial guarantor is positive for the financial guaranty industry in that it may help to validate the product,” agreed Moody’s in a sector comment released Tuesday.

“The firm will face the typical challenges of startups and looks to enter a sector that is still showing signs of dislocation following a number of business failures and amid an unprecedented low interest-rate environment,” Moody’s said. “At the same time, BAM, with its narrower business focus, mutual structure and no legacy exposure, could gain traction as an attractive alternative to Assured Guaranty, pressuring its competitive position.”

Mousseau noted that while interest rates are low now, in a few years rates will likely rise. That will make for wider spreads in interest rates between high and low-rated credits. The bond insurers can look forward to having an easier time finding business in that environment.

For Thompson to recommend BAM to issuers, he would have to believe that issuers taking the insurance would get a net financial benefit without regard to future dividends, he said. As a mutual insurer BAM could pay dividends to its policyholders.

Addams also said his firm would look carefully at the premium charged by BAM to see if using the insurance would save money for his clients.

The market has to pay careful attention to many individual credits now, the trader said. BAM’s entrance could help make the market simpler and more generic.



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