Assured Assists Issuers With $1.8B of ARS Conversions

Triple-A rated bond insurer Assured Guaranty Corp. yesterday said over the last three months it has worked with issuers to convert more than $1.8 billion of auction-rate securities into both fixed-rate and variable-rate demand bonds.

Despite being one of only three stable and triple-A rated bond insurers operating in the market, some issuers with auction-rate securities insured by Assured saw auctions fail or reset at significantly higher rates. The other triple-A rated insurer, Financial Security Assurance Inc., also witnessed similar market dynamics on the ARS it has insured.

"It's not in our best interest or theirs to have them pay higher debt service costs," said Bill Hogan, senior managing director for public finance at Assured Guaranty. "For the deals we insured, we tried to make the [conversion] process as easy as possible."

Of the conversion transactions, 11 with a total volume of $1 billion have closed, while another 11 totaling $826 million are in process, according to the bond insurer. The majority of those deals are in health care, though higher education and public power issuers also relied upon auction-rate programs and are seeking help converting out of the securities, Hogan said.

To help smooth the way, Assured has expedited its underwriting and closing processes and refrained from charging additional fees for the consent to convert.

Assured said it assigned a number of people in the surveillance department to the task and involved the legal department. And for those issuers looking to convert ARS to variable-rate demand bonds, the insurer has negotiated terms with about 12 to 15 liquidity banks and settled on some common-term sheets that it is able to use for future discussions.

"One of the challenges in the process of working with issues converting to variable-rate demand bonds is negotiating the terms with the liquidity banks," Hogan said. "At the end of the day it has worked out well."

Many of Assured's peers in the bond insurance industry have taken similar steps to work with issuers faced with failing auction or increased interest rates. However, in some cases, their activity stands in contrast.

In at least one case, Ambac Assurance Corp. has refused to terminate a policy tied to ARS issued by the Connecticut Housing Finance Authority, according to John Craford, CHFA's executive vice president for finance and administration. Craford mentioned it in a panel discussion last week at The Bond Buyer's National Municipal Derivatives Institute in New York.

And while MBIA Insurance Corp. and Ambac have both taken active roles working with issuers converting out of ARS, they have had to pursue more flexible solutions, including ways to negate an insurance policy or defer it until a time in the future.

Yesterday, Ambac said it had written down an additional $228 million this month in mark-to-market adjustments on collateralized debt obligations of asset-backed securities. While the bond insurer sought greater transparency through the disclosure, it also highlighted the continuing challenges facing some of the bond insurers.

As a result, and despite the actions of Assured Guaranty and the other bond insurers working with their clients to address the current turmoil, more competition may soon enter the market.

The New York Post yesterday reported that Ripplewood Holdings LLC, a private equity investment firm, might soon start a monoline bond insurer. Representatives with the company did not return a call to its Manhattan offices.

The paper was quick to point out that discussions are in the early stages, but the likelihood of another insurer entering the market is certainly possible. New York insurance superintendent Eric Dinallo has admitted to having talks with private equity firms and an investment bank, while Rob Haines, a senior analyst at CreditSights, wrote in a recent research report that Berkshire Hathaway Assurance Corp. executives mentioned to him that Goldman, Sachs & Co. and American International Group Inc. may be interested.

Two pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System, may also be considering the formation of a new bond insurer.

 

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