National Public Finance Guaranty, the municipal bond insurance unit of MBIA Inc. laid off 29 executives and employees, shuttering its new business operation after being downgraded by S&P Global Ratings.
“With no clear path for the restoration of National’s ratings to a level that would allow it to compete effectively, we have decided to abandon our efforts to actively write new business at this time,” Bill Fallon, CEO of National, said in a statement Wednesday. “Last week, we said good-bye to a number of our colleagues who have worked diligently and admirably for the company and its stakeholders. In addition to reducing operating expenses, we will proactively seek ways to enhance our shareholder value, while protecting the interests of all of our policyholders.”
National declined to name people who were laid off, citing privacy concerns. According to market sources, Tom Weyl, Nick Sourbis and Ted Galgano were among those let go, leaving mostly lawyers, compliance and risk personal. Weyl had been hired at the end of 2014 as head of new business development. Sourbis was managing director and head of the northern region. Galgano was managing director of new business for the southern region.
National was established in February of 2009 and didn’t start writing new business until it received its AA-minus rating from S&P in March of 2014. S&P last week cut National's rating two notches to A, citing concerns over its competitive position. National's effort to build business was constrained by low interest rates after overall insurance penetration in the municipal market dropped to 6% as of the end of last year from over 50% before the financial crisis.
Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC., said that the layoffs confirm expectations that National would wave the white flag and go into run-off mode after the S&P downgrade.
“Once you lose your ‘high quality’ rating, particularly in a market with tight credit spreads, you have to reassess your entire business plan,” said Cure, who said he went through a similar experience, almost 9 years ago at Financial Guaranty Insurance Co.
“At this point, it seems futile and a waste of money for National to maintain a new business team," Cure said. "National will still require a large staff to monitor their existing portfolio including finance, surveillance, legal, and IT personnel. This is particularly true as National deals with its exposure to Puerto Rico, but new business underwriting at this point seems out of the question. Run off seems to be the only logical course.”
With National's retreat, Assured Guaranty Corp. and Build America Mutual are the only firms writing new municipal bond insurance. S&P last week affirmed its AA ratings on Assured and BAM.
Several sources familiar with the situation at National said the company's prospects dimmed once the credit watch negative was placed about a month ago, and that people at the firm were surprised and confused when S&P put the watch on.
“[National’s] approach was slow and cautious, but they did give projections to S&P such as market share, and the rating agency never voiced any displeasure,” one of the sources said. “National was beating [its own] projections. As a matter of fact, on June 1st, National had their single best day in the market when they won seven deals, upping their market share to 7%, which was by far the best since it relaunched.”
S&P put the firm on credit watch negative on June 6. The sources also said the rating agency's comments on volume and pricing showed S&P misunderstood the bond insurance business model, especially in today’s environment.
“They don’t understand pricing of municipal bonds and the way bond insurance works in the marketplace, yet they are calling the shots." the source said. "National could have not possibly match their competitors wrap ratio with the rating they had versus the other two. However, we found the marketplace valued National more than S&P, as National's actual market pricing infers market acceptance at a level greater than the prior rating of AA-minus."
After the market closed Wednesday, Kroll Bond Rating Agency put out a report affirming its AA-plus rating of National with a stable outlook.
“KBRA recognizes the roles that new business and competitive position play in building the capital base of a financial guarantor. However, those factors should not be significant drivers of the rating for a company with National’s substantial book of historical business and balance sheet,” said the report. “The appropriate analytical framework for evaluating a financial guarantor focuses on an analysis of claims paying ability, which should be the dominant consideration in assessing credit worthiness.”
Kroll previously noted the rapid decline of National’s insured portfolio continues to outpace the decrease in National’s balance sheet which has led to further declines in leverage from historical levels, a positive development from a credit perspective.