Fewer municipal issuers decided to buy insurance for their bonds during November, as worries over the bond insurers weakened the value of the companies’ wraps and investors showed more interest in buying unenhanced bonds. Of the $28.8 billion of bonds sold last month, about $12.2 billion carried insurance, according to Thomson Financial. This insurance penetration rate of 42.4% was a drop from the year-ago November rate of 48.2%. About 50% of all muni bonds sold since 2000 have insured.“We routinely are analyzing insurance versus selling uninsured — period,” said Dave Andersen, managing director and head of municipal trading and underwriting at Merrill, Lynch & Co. “If the insurance adds value based on the cost of the insurance, then its going to get used.”He said that underwriters have to attest at the time of pricing that the insurance added value. “As of today, there is only one insurer that has been able to get a better price than where the underlying credit is,” Andersen said, though he declined to specify which insurer that was.Several sources have said, however, that Financial Security Assurance Inc. is now the market’s insurer of choice.Standard & Poor’s Securities Evaluations now quotes an FSA-insured scale in a list of pricing scales that is sends periodically to clients. As recently as Nov. 12, the pricing service had based its insured scale on the average yields for bonds insured by all of the triple-A guarantors. Each of the three major credit rating agencies have announced they are reviewing the insurance companies to decide if the recent wave of downgrades among structured-finance securities also warrants downgrading the insurers. Fitch Ratings and Moody’s Investors Service indicated in their review announcements which companies they think are most likely to come up lacking in capital adequacy tests, and fixed-income markets have now factored these implicit rankings into the prices of the bonds that each company backs.CIFG Guaranty was listed as the most at-risk of the triple-A insurers. The company announced in late November that its parent company had arranged for a $1.5 billion capital injection, though Moody’s said Wednesday that CIFG is still the most likely to have a capital shortfall.Assured Guaranty Corp. and FSA have been identified as the least likely to need more capital, while the other companies were listed somewhere between these two and CIFG.During November, several stories emerged of state and local governments deciding to forgo insurance entirely and test the markets on their own, underlying credit ratings.“The uninsured bid is getting stronger because the investment community is realizing that the underlying credits are stronger than the insurers that are insuring them,” Andersen said.In a deal senior managed by Andersen’s team at Merrill, New York City’s Municipal Water Finance Authority on Tuesday sold $446 million of water and sewer system revenue bonds without insurance. Fitch rates the bonds AA, while Moody’s rates them Aa2, and Standard & Poor’s has a AA-plus mark on them.“The economics didn’t work,” said Bob Lamb, the water finance authority’s financial adviser, when asked why they opted to forgo insurance. Lamb, president of Lamont Financial Services Corp., said his firm has helped four highly rated issuers sell bonds this month and that none of them used insurance.Thomson data also indicated, however, that more than $2 billion of bonds sold last month carried letters of credit — a 16.3% rise from last November’s figure. The increase could signal that investors are still interested in buying bonds that carry credit protection, even though they are hesitant to use the much-criticized bond insurers.Through the first 11 months of 2007, about 48.7% of the $398.1 billion of bonds sold have been insured, Thomson data showed.Record volume pace With just one month of 2007 left, the overall total of municipal issuance is fast approaching the record $408 billion set in 2005. This year’s total through November is already more than the $389 billion sold in all of last year.The updated volume data for November was about $3.7 billion higher than preliminary figure The Bond Buyer reported Monday based on data collected through last week. Thomson’s updated figures for any given month usually show an increase from the initial data, as dealers continue to report bond sales from the final days of the month.November’s volume was down 32.5% from the $42.7 billion sold during the same month last year. The drop came from a decline in bond sales in nearly every sector, with only the smaller development and environmental facilities sectors showing increases.About $7.7 billion of education bonds, typically the largest type of municipal bond sales, were sold last month — down 26% from last November’s figure.While there were fewer fixed-rate bonds and variable-rate bonds with short puts sold last month, the total par of auction-rate bonds sold increased 50% from the year-ago month. More than $4.2 billion of auction-rate bonds were sold last month.
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