Muni Insurance May Return to 20% of Market, Friedland Says

Municipal-bond insurance may return to cover 20 percent or more of the debt sold by U.S. state and local governments, said Eric Friedland, head of municipal-credit research at Schroder Investment Management North America.

“There is a need for some level of bond insurance, especially for the retail investors,” Friedland said at the State and Municipal Finance Conference hosted by Bloomberg Link in Chicago. “Penetration won’t be 50 percent,” he said, though it could reach the “teens or low 20s.”

With more than 50 percent of bonds insured in the municipal market, most credits were given top grades from rating agencies. That lowered borrowing costs for state and local governments. About 4 percent of debt sold this year through May was insured, according to a report from Bank of America Merrill Lynch.

Analysts at the bond-insurance companies also provided legal protection for bondholders through stronger covenants and larger reserve funds, said Friedland, whose New York subsidiary of London’s Schroders Plc. (SDR), manages about $2 billion in municipal bonds.

“When bond insurance was more prevalent, the structures were a lot stronger,” Friedland said. “I’ve definitely observed, being on the buy side now, legal provisions getting somewhat weaker.”

To contact the reporter on this story: Brian Chappatta in Chicago at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net