Build America Mutual Assurance Co., the municipal-only financial guarantor seeking to establish itself in a reviving bond insurance market, this month wrapped $76 million of new general obligation bonds for Michigan issuers to help them overcome the taint of Detroit’s bankruptcy.
BAM has insured four Michigan deals totaling $76 million so far in September, including Wednesday’s expected $16.5 million city of Westland, Wayne County, general obligation bonds. On Sept. 12, BAM insured the first sizable deal of local Michigan general obligation bonds, $15.4 million of Battle Creek GOs. The insurer wrapped $35 million of Genesee County general obligation bonds on Monday.
Battle Creek and Genesee bonds, originally set for Aug. 1, were delayed as investors became wary of local Michigan GO debt after Detroit’s July bankruptcy filing, in which Detroit Emergency manager Kevyn Orr said the city would treat its GO debt as unsecured. The Battle Creek bonds, which did not originally include insurance, may have opened the door for more Michigan issues, the city’s underwriter said.
“Our success shook the trees and got some deals free,” Bryan Derdenger, head municipal underwriter at Hutchinson Shockey Erley & Co., said in an interview. “Some other people saw our success and maybe attributed it to BAM. They’re getting good rates and business is opening again.”
Michigan general obligation bonds issued between Aug. 1 and BAM’s first insured Michigan deal this month totaled just $17 million. On Sept. 6, BAM backed $9.2 million of Brownfield redevelopment authority GO bonds. Since August, BAM has wrapped 80% of the $95 million of new Michigan GO issues. Insured municipal bonds outperformed general obligation debt in July and August, as investors placed more value on guarantees amid falling bond prices and default concerns.
“These are very different profiles from Detroit,” Suzanne Finnegan, chief credit officer at BAM, said in an emailed statement. “We believe these credits share relatively stable population levels, manageable debt burdens, satisfactory reserves and sound financial operations. The underlying fundamentals for both include a limited tax GO pledge, as well as additional sources of payment.”
Battle Creek bonds, with underlying ratings of Aa3 by Moody’s Investors Service and AA by Fitch Ratings, attracted 41 separate investors. Investors ranged from mutual funds to insurance companies and asset managers, a pool that wasn’t available without insurance, Derdenger said.
“In premarketing we mentioned that we were looking into getting insurance and a good handful of customers stated that they would not participate without it,” Derdenger said. “It brought more buyers in, and that helped pricing even more. It fully offset the cost of insurance, which was so minimal it made sense.”
The city of Battle Creek originally planned to issue the bonds without insurance, Linda Morrison, the city’s finance director, said in an email the week that the original deal was pulled from the market. Bankers called Thursday’s deal a “remarkable success.”
In the Genesee County deal Monday, bonds maturing in 2038 with a 5.125% coupon had a yield of 5.51%, compared with 5.08% on Friday’s single-A Municipal Market Data scale. On Wednesday, the city of Troy, Michigan, issued uninsured triple-A rated GOs and paid a between 50 to 100 basis points more on interest rates than similarly rated debt, MMD yields showed.
“Our issuance definitely showed that there’s acceptance to local credit in the state of Michigan,” Derdenger said. “The penalty is minimal if it’s there. The AA rating from BAM was helpful.”
BAM is rated AA-stable by Standard and Poor’s Investors Service. Assured Guaranty’s municipal-only business Municipal Assurance Corp is rated AA-minus by S&P and AA-plus by Kroll Bond Rating Agency. Berkshire Hathaway Assurance Corp., which represents less than a percent of the market, is rated AA-plus by S&P. Assured has backed around $10 million of Michigan debt in the secondary market since Aug. 1.
“We have seen around twenty Michigan issuers come to market over the last six weeks,” Robert Tucker, managing director of corporate communications at Assured, said in an email. “As always, we continue to look at credits on a case-by-case basis, and our underwriting decisions remain driven by our credit quality considerations and our pricing discipline.”
BAM launched in July 2012 with the goal of providing municipal-only insurance in a market still reeling from the financial crisis, which left Assured as the lone active guarantor. Since then, BAM has insured more than $3.15 billion in par amount over 423 transactions since its first deal on Sept. 12, 2012. Up until the Brownfield deal, BAM had insured just four Michigan GO issues. S&P said it expected BAM to insure $10 billion in the company’s first 12 months of operation. The fact that BAM only began ramping up its portfolio in January and record low credit spreads made that figure a lofty expectation, S&P said.
“While they have insured only $3.2 billion, there is a lot of pent-up demand by issuers to issue over the next 12-24 months due to capital expenditure requirements and issuers holding back on issuance due to a volatile interest-rate environment,” said Marc Cohen a credit analyst at S&P. “While the first 12 months may be shy of our original estimation, we believe that as BAM attains greater transparency and liquidity, a major inflow of issuance will occur towards the latter part of the year.”
Standard & Poor’s has become comfortable with BAM’s competitive position profile, even though the company hasn’t insured the $10 billion as originally estimated, based on the number of policies they underwrote and BAM’s market share, Cohen said.
This month’s Michigan deals will be one step closer to building out BAM’s portfolio.
“We were happy to help Genesee County and the City of Battle Creek save money on the issuance of their transactions,” Sean W. McCarthy, Chief Executive Officer of Build America Mutual, said in an email. “Both are strong underlying credits and are fundamentally different than Detroit.”