National Public Finance Guarantee Corp. is sharing what it knows about municipal bonds.
The company, which is the public finance insurance subsidiary of MBIA Inc., is awaiting the outcome of litigation that may determine whether it regains the rating levels it needs to begin writing business again.
In the meantime, it’s begun publishing a series of reports outlining credit analysis and trends in a variety of sectors.
National Public Finance — which insures $537 billion in municipal bonds, or nearly a fifth of the market — does not intend for the reports to serve as recommendations about what to invest in. The company instead is trying to provide useful insights into the credits it insures.
The first report
Airport bonds are one of the more stable and resilient sectors in the industry, according to the insurer.
Most airports are owned by local government agencies, which sell bonds to finance construction or improvements.
The government agencies charge airlines fees to use the facilities, including terminals and runways. The credit quality of airport bonds are derived from the reliability of the fees.
With oil prices extraordinarily volatile and major airlines going bankrupt routinely, one might think many airports would be in trouble.
They are not, National Public Finance said.
The last few decades have shown that the credit quality of airlines and the credit quality of airports are not closely related.
The fundamental supports of airport bond credit quality remain steady in the face of tough times for the airline industry, the insurer said.
“Even in light of airline consolidations resulting in redundant hubs and prominent bankruptcies of principal carriers, there has proven to be little, if any, correlation between the credit quality of airlines and airports,” the insurer wrote in its report.
Why? Most airports are regional monopolies, or at least something approaching monopolies. In addition, they can hike rates to pay off their bonds without chasing away airlines because fees represent only a small part of airlines’ costs.
Citing industry trade groups, National Public Finance said fees are well less than 10% of most airlines’ costs, meaning carriers do not weigh airports’ fees heavily when deciding where to operate.
The insurer notes that aside from raising fees, airports can also defer capital projects to save money. The company expects airports to utilize a number of tactics to maintain operating flexibility and keep raking in fees from airlines.
The second in the series of reports
This sector was born in 1996, when the federal government approved the Military Housing Privatization Initiative to respond to the obsolescence and deterioration of housing for military personnel and their families.
Under the program, the military establishes a partnership with a private developer. That partnership sells taxable bonds to finance the construction or development of housing for military personnel and their families.
The bonds are secured by the rents people pay to live there.
This sector has not seen much new issuance in the past 18 months because of turbulent capital markets, competition from the broader housing market for tenants, and wider spreads.
Aside from the general woes in the housing industry, the rents tenants pay to live in the projects are largely based on their allowances from the military, which are unpredictable at the moment.
Military initiatives to close or realign some bases could lead to an oversupply of housing at some bases and an undersupply at others, National Public Finance said.
The primary driver of a military housing bond’s credit is “essentiality,” according to the insurer. Essentiality, or the importance of a base, ensures it will not be closed.
National Public Finance insures $8.5 billion in military housing bonds, or 40% of the industry. In fact, a major factor hobbling credit in the sector last year was the downgrade of the insurer itself.
