Sell Side

Assured Guaranty Shrugs Off Downgrade

In the weeks after the long-awaited downgrade of Assured Guaranty Municipal Corp. and Assured Guaranty Corp. by Moody’s Investors Service, little if any impact can be seen in the municipal bond market.

Generally, most market participants had been expecting a downgrade — though maybe not a multi-notch downgrade to A2 from Aa3 — and most still believe that AGM’s bond insurance product provides value.

Roosevelt & Cross Inc., for example, has used the bond insurer since the downgrade, most recently on a $6.69 million general obligation school district refunding deal for the Colton-Pierrepont Central School District in New York, which priced on Jan. 25.

Bonds maturing from 2016 through 2023 and in 2025 were insured by AGM and priced at yields ranging from 0.85% with a 2% coupon in 2016 to 2.27% with a 2.25% coupon in 2025.

Bonds maturing from 2013 through 2015 and in 2024 were not insured and held A-plus ratings.

AGM still holds a AA-minus credit rating from Standard & Poor’s.

Herman Charbonneau, senior vice president and manager of public ¬finance at Roosevelt & Cross said the firm will continue to use AGM wherever they can get the most cost-effective outcome.

“It’s strictly about the numbers. AGM has a certain trading value in the marketplace and there are a lot of AGM-insured bonds out there,” he said. “You can see where they’re trading and you can measure the value of the insurance.”

Charbonneau said that most of the insurance demand today is for retail-oriented paper and mostly on the longer maturities.

“I would say there’s not been a massive reaction to the Moody’s downgrade,” he added. “I think the market anticipated a downgrade, and we haven’t had trouble estimating the value of AGM insurance.”

According to Assured Guaranty, the company did not lose any business that was already in progress at the time of the downgrade.

“Assured Guaranty had commitments for 47 transactions that had sold with our insurance but not yet closed at the time of the unjustified and unsupported rating downgrade by Moody’s,” said Robert Tucker, managing director of investor relations.

“All of those transactions, which aggregate to $385 million in par, have closed or are expected to close as scheduled and originally priced.”

The company also continued insuring new deals following the downgrade. The day after, AGM insured all maturities in a $5.1 million deal for the city of Brighton, Mich., which was priced by Fifth Third Securities. In the week following the downgrade, AGM was used on eight deals.

“The fact that they’re being used at all, in what will probably be the worst days for them — immediately following the downgrade — shows that market demand hasn’t been crushed,” said Matt Fabian, a managing director at Municipal Market Advisors.

He also said he hasn’t seen much market impact from the downgrade.

While the Moody’s action doesn’t seem to have hurt current business much, going forward, Fabian said he thinks the downgrade will hinder their progress in pricing, as well as their ability to broaden demand for their product.

“The downgrade will have increased market cynicism about bond insurance in general,” he said. “So current users continue to use, but it may be harder for Assured to find new customers or new buyers — at least right now.”

Patrick Early, chief municipal analyst at Wells Fargo, also hasn’t seen any immediate effects on the market.

He noted in a recent research note that, following the downgrade, AGM has not been impeded in closing and selling new deals in the market with its lowered rating.

“Further, we have not seen any sell-off of AGC- or AGM-insured muni bonds as a consequence of the Moody’s action, which we believe is a function of the market favoring the AA-minus Standard & Poor’s rating, and to some extent, the market already having factored in a Moody’s downgrade due to the long negative watch,” Early said.

He added that while Moody’s brought up some legitimate concerns regarding the direction of bond insurance, it undervalues the aspect of bond insurance in which retail investors are most interested.

“Given the heavy reliance on more subjective, prospective aspects of the monoline insurance business rather than the quantifiable benefits of capital base, unearned premium reserve, claims-paying ability and portfolio quality, we feel the Moody’s rating falls shy of what investors should be expecting from a rating: namely, a measurement of the ability of a financial guarantor to cover claims as they come due,” he said.

Alan Schankel, managing director at Janney Capital Markets, has said that he believes Assured Guaranty is quite capable of covering its municipal bond obligations in future years.

In a recent report, he also noted the value in not only Assured Guaranty but in other bond insurers as well. He pointed to instances where bond insurers, including Ambac and MBIA in addition to AGM, benefited investors, including in Harrisburg, Pa., Stockton, Calif., and Jefferson County, Ala. Schankel said these are instances where bond holders would not have been paid if it weren’t for the insurers.

Despite a declining market share for the bond insurance industry, there continues to be demand for the product. So far this year through Feb. 1, insurers have wrapped 78 issues for a total par value of $644.2 million.

For AGM, business seems to be continuing without much difficulty. Since the downgrade on Jan. 17, the insurer has been used in 17 deals.

For the year through February 1, the insurer has worked on 55 issues, totaling $518 million, according to Thomson Reuters’ data. That gives them an 80.4% market share for January. The day after it was downgraded, Assured Guaranty Ltd.’s shares rose from the day before to close at $14.61. On Feb. 1, AGO closed at $18.32.



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