S&P cites 'increased opportunities,' 'excellent capital adequacy' for Assured in current market environment
The two remaining active monoline municipal bond insurers are experiencing a boom in business stemming from investors’ credit concerns and Assured Guaranty just got another nod from a rating agency showcasing its resiliency.
S&P Global Ratings issued its annual report on Assured Guaranty, affirming its AA rating along with a stable outlook. .
“In addition to reiterating how our strong capital position, exceptional liquidity and proven business model support our AA financial strength ratings, S&P noted our increased opportunities in the current market environment,” said Dominic Frederico, president and CEO of Assured. “These opportunities resulted in increased municipal bond insurance penetration during the second quarter and significant increases in new business volume for Assured Guaranty in both primary and secondary public finance markets.”
“Assured’s capital adequacy should allow it to withstand the economic effect of the COVID-19 pandemic on underlying issuers within its portfolio and losses on its exposure to issuers in Puerto Rico,” wrote primary credit analyst John Iten. “The combination of a very strong business risk profile and very strong financial risk profile leads to a split anchor of 'AA/AA-'. We chose the higher anchor due to redundancy of capital at the current rating level.”
S&P noted that Assured has a very strong competitive position based on a well-defined, diverse underwriting strategy.
“Although much of the group's business has been insuring debt issues in the U.S. public finance market, underwriting includes global structured finance and international local and regional government bonds as well as infrastructure projects,” the release said. “We view management's approach to writing business in these markets as well thought out and measured. This underwriting strategy provides flexibility to capitalize on opportunities in one market when other markets are less favorable.”
So far this year, Assured has wrapped $7.68 billion in 469 deals, compared to $5.71 billion in 423 transactions in the first six months of 2019.
“S&P’s confidence in Assured Guaranty’s new business opportunities is confirmed by the increase in demand for our insurance,” said Bill Hogan, senior managing director, public finance at Assured. “As the economic impact of COVID-19 has heightened the market’s focus on credit quality, both investors and issuers are placing greater value on the benefits of our unconditional financial guaranty.”
S&P said that it may lower its ratings if Assured “exhibits significant volatility in earnings, its non-U.S. business meaningfully alters the risk profile of its insured portfolio, or its capital adequacy falls below 1.0 times and we believe Assured will not be able to improve its capital position.”
“Based on our view of the insurable new-issue U.S. public finance and global market, we don't believe Assured's competitive position or earnings will dramatically change, so we don't expect to raise our ratings in the next two years,” the rating agency said.
COVID-19 has had a tremendous impact on the muni market and all financial markets. For munis, it caused a two-week long hiatus of the primary market access, and among other things, it created a flight-to-safety which pushed U.S. Treasury bond yields much lower, much faster than the municipal bond market as investors focused on credit risk, creating wider spreads between differently rated municipal issuers.
S&P added that although new-issue volume has begun to rise, credit spreads remain wider than they were pre-COVID-19.
“As a result of this flight-to-quality and the associated spread widening, Assured has experienced strong demand in the secondary market as the economics of bond insurance are appealing to institutional investors as a tool for risk mitigation,” the report said. “Wider credit spreads and investor uncertainty should continue to provide Assured with primary and secondary underwriting opportunities in the U.S. public finance market.”
S&P said because of Assured's remaining exposure to issuers in Puerto Rico, coupled with potential capital stress related the COVID-19 pandemic, the rating agency believes its capital position could absorb future losses of roughly $2.5 billion to $2.7 billion. In this scenario, without accounting for any other factors, our assessment of Assured's capital and earnings wouldn't change. Its analysis of the remaining exposure to issuers in Puerto Rico includes the effect of loss payments up to 45% of remaining debt service coming due each year beginning in 2020.
S&P also ran a COVID-19 sensitivity stress test, which “indicated that the incremental increase in loss assumptions would still result in a capital adequacy assessment of excellent.”
S&P concluded that while the COVID-19 pandemic is causing significant volatility in the U.S. financial markets and presents fiscal challenges ahead for all U.S. public finance sectors, it views the potential impact to Assured as somewhat low at this time. Notwithstanding the current macroeconomic environment, defaults of U.S. public finance issues insured by Assured are not expected to be widespread, but there is potential for downward rating migration for some insured issues.
“We consider Assured's funding structure neutral to the rating. Its broad access to capital markets as a publicly listed company and track record of debt issuance, along with sound capital management, underpin our assessment,” said the report. “We expect Assured to continue to produce financial leverage and fixed-charge coverage metrics that support the rating.”