Although market conditions and a still relatively low interest rate environment continue to hamper the bond insurance industry, there continue to be encouraging signs including a slight uptick in the insurance penetration rate.
For the past few years, the bond insurance industry has been made up of three players: Assured Guaranty Corp., Build America Mutual and National Public Guarantee Corp. However, in June, S&P Global Ratings handed a two-notch downgrade to National, which then caused the muni-only arm of MBIA Inc. to curtail its new business and lay off 29 employees. A month prior to the downgrade, S&P placed both National and BAM on credit watch negative, but later affirmed BAM's rating at AA stable.
Assured, Build America Mutual, and National Public Finance Guarantee wrapped a total of $11.81 billion in 865 issues, down 8.5% from $12.91 billion in 977 transactions during the first half of 2016.
Assured increased their leads in the municipal bond insurance rankings in the first half as they insured $7.01 billion of par in 435 transactions as its share of the insured market rose to 59.4% from 53.6% in first half of 2016, according to data from Thomson Reuters. Assured's insured par so far in 2017 is higher than the $6.93 billion in 466 deals during the same period the year before. The figures include Assured's subsidiary Municipal Assurance Corp.
“We were the guarantor on more than half of the insured transactions sold in the primary market, and the more than $7 billion of new-issue par we insured was 60% of the insured market, up from 53% during the same time period in 2016. Assured’s first-half insured par was up 2.3% year-over-year, while industry insured par declined 8% and total market issuance fell 13%,” said Robert Tucker, senior managing director of communications and investor relations for Assured.
Tucker said that compared with the first half of 2016, bond insurance penetration improved slightly to 6.3% and that for transactions with single-A underlying quality, bond insurers guaranteed 59% of the transactions, a slight increase from six months of 2016, and 28% of the par volume, up from 23% a year ago.
“Additionally, Assured Guaranty saw very strong gains in our secondary market activity, issuing 241 policies for a total of $1.2 billion of par, up 62% year-over-year. In aggregate, our primary and secondary market activity totaled $8.2 billion for the first half, up 8% compared with the same time period last year,” said Tucker.
Tucker added that during the half, Assured’s market position strengthened among institutional investors, as it continued to be selected to insure all or a portion of very large transactions. Assured insured more than $100 million of par on each of 12 different transactions during the period. Assured is also the only active guarantor with stable AA-category ratings from two different rating agencies. Kroll Bond Rating Agency rates both Assured Guaranty Municipal and Municipal Assurance Corp. at AA-plus.
BAM's insured principal amount dipped to $4.18 billion across 356 deals or 35.4% market share, from $5.61 billion or 43.5% market share the same time the year before.
“It’s been a strong year for the use of bond insurance: Insured transactions are making up a larger percentage of the overall market, and we believe this growth will be long lasting,” said Scott Richbourg, head of public finance at BAM. “There was obviously volatility in the market during the S&P rating review in June, but once that was resolved and BAM’s rating was re-affirmed at AA/Stable, we quickly saw our activity return to business as usual.”
Scott Sollers, who manages the West region in public finance for BAM said that they are seeing a positive trend of underwriters recognizing the added value from insurance and the greater benefit it offers their issuer clients.
“That shows up in cases where we insure specific maturities of larger transactions – for instance, when the City of San Jose sold airport revenue bonds in the spring, they purchased insurance specifically for the maturities that were targeted for retail buyers, and we saw a similar execution in June on an Irvine USD Community Facilities District transaction.”
He also added that as issuers sell more new-money transactions, they are increasingly thinking about the full life-cycle of their issues, including potential future refundings.
“That puts a spotlight on BAM’s ability to offer ‘split premium’ pricing – where the issuer pays an upfront premium that only covers the period until the call date, and then pays an annual premium only if the original bonds remain outstanding,” he said. “We’re seeing more financial advisors and underwriters crunching the numbers on those options and choosing them where they make sense due to the likelihood that the issue will be refunded.”
National finished the half with $609 million of par insurance, up from $376 million for first half of 2016. Its market share rose to 5.2% from 2.9%.