Bond insurance issuance outpaced industry volume decline in 2018
Municipal bond insurance may have finished 2018 down 18.1% from where it was the year before, but it outpaced the 23.5% decline the overall industry saw due to changes in tax legislation.
The two active municipal bond insurance companies -- Assured Guaranty and Build America Mutual -- combined to insure a total of $18.88 billion across 1,247 deals this past year, down from $23.04 billion in 1,637 transactions in 2017, according to data from Refinitiv.
Insurance penetration rose to 5.90% at the end of 2018, up from the 5.29% it was at the end of 2017. However, when you exclude high-rated ‘mega-issuers’ the insurance penetration picture looks quite different.
According to data from Ipreo, overall in single-A issuers, 55% of the transactions and 18% of the par was insured. School financing uses insurance more widely than the general market, in large part because it has fewer large issuers than sectors like transportation. Among all K-12 school district bonds, 9.5% were insured, and in seven states, more than 25% of school bonds were insured.
Another interesting tidbit was that Texas Municipal Utility Districts were another sector where insurance is used widely, again, in part because they are small- and mid-sized issuers; 61% of the par was insured in 2018.
The higher penetration in those sectors is important because it demonstrates that insurance is a go-to market access tool for a significant percentage of the market.
Assured Guaranty Corp. was the top municipal bond insurer in 2018. Assured insured a total of $10.53 billion in 596 deals for a 55.7% market share, compared with $13.46 billion in 832 transactions or 58.4% market share the year before. The figures include Assured's subsidiary Municipal Assurance Corp.
“Assured Guaranty, through its two platforms, AGM and MAC, continued to lead the market throughout 2018, insuring close to $11 billion of primary market par volume on nearly 600 tax-exempt and taxable new issues sold across a broad spectrum of bond sectors, transaction sizes and deal structures, including public-private partnerships,” said Robert Tucker, senior managing director of communications and investor relations for Assured. “We garnered 57% of insured new-issue volume sold during the year, including $500 million of corporate-CUSIP taxable bonds that it insured for ProMedica Healthcare’s Toledo Hospital. That transaction included an additional $25 million of Assured Guaranty insurance on traditional tax-exempt bonds.”
Other notable healthcare transactions included insured new issues of $301 million for Montefiore Medical Center, located in Bronx County, New York, and $135 million for the Oklahoma University Medical System, as Assured Guaranty expanded its healthcare activity in both the primary and secondary markets.
“In total, Assured Guaranty insured $11.8 billion of par across the primary and secondary markets in 2018,” Tucker said. “Assured Guaranty has the scale to insure large transactions without any single transaction representing a material amount of exposure. During 2018, Assured Guaranty was selected on 16 different transactions to insure more than $100 million of par.”
Beyond the healthcare space, examples of major infrastructure transactions included one that helped provide broader market access for Detroit Downtown Development Authority’s $311 million tax increment financing and another that helped lower interest costs on more than $100 million of bonds for the LAX People Mover Project (LINXS), a transaction awarded The Bond Buyer’s Far West Region Deal of the Year.
Among general government credits, Assured Guaranty insured portions of two transactions for the Commonwealth of Pennsylvania that aggregated to $660 million of insured par across the Commonwealth’s general obligation and appropriation-backed bonds.
“During the year, S&P Global Ratings and Kroll Bond Rating Agency once again recognized the strength of the Assured Guaranty franchise by affirming, with stable outlooks, S&P’s AA rating assigned to Assured Guaranty Ltd.’s insurance subsidiaries and KBRA’s AA+ ratings assigned to both AGM and MAC,” said Tucker.
BAM accounted for $8.36 billion of insured volume spanning 653 transactions or 44.3% market share last year, compared with $8.95 billion in 732 deals and 38.9% market share.
“At this point, investors are expecting to see insurance on new-issue transactions in certain sectors of the market – particularly for smaller and medium-sized issues where it’s not cost effective for the buy-side to invest in the credit review and surveillance activities that we can perform more efficiently,” said Scott Richbourg, BAM’s head of public finance. “The fact that refunding volume was down last year didn’t disrupt that long-term trend, particularly if you focus on the target market for insurance, which excludes transactions that are ineligible for BAM insurance or carry higher ratings that will not benefit from our guaranty.”
He also noted that 21% of the transactions in that target market were insured last year, up 10% from 2017, and the growing primary-market presence and liquidity helped increase demand in the secondary market, where BAM’s par insured rose 20% year-over-year.
“We’re going to stay focused on demonstrating the value of insurance to issuers and investors in more of the market,” said Richbourg. “For BAM, that’s one reason why we introduced the BAM GreenStar assessment that verifies that green bonds sold by our members align with the international standards for that sector, at no extra cost.”
BAM is also working on ways to distribute its 5,000-plus BAM Credit Profiles more widely, to make sure investors know they can look to them as a reliable source for continuing disclosure information.