The financial crisis last year blew the credit-enhancement industry apart.
The rankings for bond insurers and letter of credit providers in the first half of 2009 bear minimal resemblance to the past half-decade.
Some of the companies that in past years were at or near the top of the Thomson Reuters tables listing credit-enhancement providers are nowhere to be found in the tables for the first six months of this year.
And some of the participants nowhere to be found in the past are now near the top.
Bond insurance in particular offers a stark contrast. Downgrades by the three major rating agencies have upended the value of insurance, squeezing penetration rates and forcing several major insurers to find new ways to stay afloat.
In an industry that used to have seven viable competitors, just three insurers have been active this year.
Two of them — Assured Guaranty Corp. and Financial Security Assurance Inc. — merged and now form the dominant insurer. The two companies combined for an 83% market share in the first half, with 1,179 insured issues at $20.87 billion face value.
That was mostly Assured Guaranty, whose insured principal amount for the period fell only slightly, to $17.8 billion.
Under its former parent company, Dexia, FSA’s underwriting collapsed to just $3.07 billion from $34.08 billion in the first six months of last year.
Dominic Frederico, chief executive of the merged company, said he expects FSA’s volume to bounce back not to where it was last year, but perhaps to a level similar to Assured.
He also welcomes more competitors. Municipalities need more insurance than Assured and FSA are capable of providing, he said.
“You still hear a lot of complaints in the market that there isn’t enough capacity,” Frederico said. “We can only do so much business.”
Warren Buffett’s Berkshire Hathaway Assurance Corp. was picky in the first quarter and even pickier in the second. The company insured four bond issues in the first three months of the year. In April through June, it insured one.
Berkshire’s market share in the first half was 2.3%, with $583.3 million in insured bonds.
Other than Berkshire, the most immediate threat to Assured’s supremacy is Municipal Infrastructure and Assurance Corp. A partnership between Macquarie Group and Citadel Investment Group, MIAC is a proposed muni-only insurer that is still awaiting ratings.
The company hopes to insure more than $25 billion of debt in its first year.
Two mutually owned insurers have also been proposed, one by the National League of Cities and one by HRF Associates.
Both Frederico and MIAC chief executive officer Thomas Randazzo say they see room for at least three competitors in the bond insurance industry. Both also say they can see more than 30% of new municipal bonds carrying insurance again.
Insurance penetration rates have tumbled from their peaks earlier this decade. More than $228 billion in insured bonds came to market in 2005, representing well more than half of municipalities’ borrowings in the bond market.
This year’s first-half insured issuance was $21.45 billion, or about $43 billion annualized. Insurance penetration in June was less than 5%.
As if further demonstration of the industry shake-out were needed, consider this: if the entire bond insurance industry this year were combined and annualized, the combined entity would have been in fourth place in 2005.
In 2005, the top nine insurers wrapped more than 7,000 issues. This year the industry is on pace to wrap 2,366 deals based on an annualized rate.
The rankings for letter of credit providers also show a new mix. The turmoil in financial markets forced downgrades of many banks, pushing some of them out of the market for short-term liquidity enhancement.
LOCs are often used on short-term instruments like variable-rate debt obligations, which need stellar ratings to be eligible for purchase by money market funds.
Those banks whose ratings survived the crisis enjoy a less competitive market with more attractive pricing, according to Rich Raffetto, who is in charge of the public sector banking group at U.S. Bank.
U.S. Bank rocketed from fifth this time last year to No. 1 in the first half of this year.
The Minneapolis-based bank provided 51 LOCs with a face value of $2.21 billion in the first half. While this only marked growth of 7.4% over last year, it nearly tripled the bank’s market share, to 19.4%.
“Our standout from a credit ratings perspective has helped us to gain market share,” Raffetto said. “We are benefiting from that flight to quality.”
JPMorgan was second with $2.15 billion in enhancement in the first half. The firm’s market share nearly doubled to 19%, despite a 47% decline in business.
Bank of America, which was first in the rankings this time last year, slipped to third. The Charlotte, N.C.-based bank’s LOC volume tumbled 83%, knocking nearly nine percentage points off the company’s market share.
The list is replete with banks that did not sniff the top 10 last year. Branch Banking & Trust Co. leaped from 17th to fifth, with $698.6 million in LOCs.
Harris NA, which was 34th last year with a 0.3% market share, is now seventh, with a 2.6% share.
Northern Trust Co. bounded from 26th to 10th, improving its market share to 2.2% from 0.6%. JPMorgan led the market for standby purchase agreements, with $282.4 million and a 21.3% market share. U.S. Bank was second with $230 million and a 17.4% share.