LOS ANGELES - Build America Mutual Assurance Company, the municipal bond-only insurer that launched less than a year ago, is quickly becoming a major player in the struggling bond insurance industry.
After its launch in July, BAM insured only four bond issues in 2012, but this year the company hit the ground running. During the first quarter of 2013, BAM guaranteed 114 primary transactions for a total of $866.5 million of new issue volume. Since its inception through the first quarter, it says it has insured 118 new issues with a par amount of $898.5 million.
Robert Cochran, managing director, chairman, and co-founder of BAM, said the company spent its first few months building its capabilities across the board, filling key management and analyst roles, building systems internally, and traveling around the country to meet with key market participants.
“We basically got ourselves ready in the third and fourth quarter of last year and then focused on building the business and building our market activity,” Cochran said. “The response has been terrific from investors, underwriters and broker dealers.”
After spending last year in preparation, Cochran said BAM began to get more aggressive about having serious market penetration in January.
Beginning with a 20% share of insured deals in the market and $138.6 million of par transactions insured during January, BAM’s business grew steadily during the quarter, according to the firm’s own figures.
In February, it insured $304.9 million, with a 53% share of the insured market, and in March, it insured $423 million, keeping a 53% share of the market for insured bonds.
In addition to getting more aggressive this year, the company has also made some changes in its premium pricing methodology, adjusting it to meet market conditions.
“I think we have figured out the sweet spot,” Cochran said. “Now it’s just an issue of building out the remainder of our licenses so that we’re actually active across the entire country.”
At the beginning this year, BAM was licensed in 17 states and the District of Columbia. Today, BAM has licenses in 37 states and expects to be licensed in all 50 in the next couple of months.
The bond insurer currently has two offices, in New York City and San Francisco, with approximately 60 employees.
BAM, which carries a AA rating and stable outlook from Standard & Poor’s, focuses on small- and medium-sized issuers, in muni-only sectors. The average transaction size that it has insured is $7.6 million, with a minimum deal size of $1 million and a maximum deal size of $52.7 million.
“We’re not going to change our strategy and go into healthcare or investor-owned utilities or some of the other sectors,” Cochran said. “We’re totally and solely focused on essential public purpose municipal bonds. That’s a big market, a big world, and there’s plenty to do.”
Taking a substantial chunk of the market share for the first quarter, BAM is shaking up a bond insurance industry that has been dramatically diminished since the global financial crisis and dominated by one bond insurer — Assured Guaranty Ltd.
Matt Fabian, managing director at Municipal Market Advisors, believes that BAM’s emergence in the bond insurance market can be viewed as a positive for the industry as a whole.
“In the end the insurance industry does better when there are more insurers who can demonstrate value or can at least market the value of insurance,” he said.
The amount of municipal bonds insured has continued a
Moody’s Investors Service said in an earlier report that BAM’s entry could help stem or reverse the decline in public finance insured penetration “by increasing the supply of insurance and extending use of the product among investors whose interest in insured bonds is constrained by their own counterparty limits.” The agency added that BAM could also heighten competitive pressures if the market fails to grow.
“In the initial few months of its participation in the insurance marketplace, BAM has already generated a more competitive environment,” Alan Schankel, managing director at Janney Capital Markets wrote in a recent commentary note. “BAM and Assured Guaranty often offer insurance on the same issues, with the cost of the premium now a competitive consideration for underwriters and investors.”
Schankel is optimistic that new issuance of insured bonds will grow in 2013 and beyond, saying that the current low interest rate and tight credit spread environment will not last forever.
