Municipal-bond insurance, which once covered half of the $400 billion of debt sold by U.S. state and local governments annually, “won’t be making a comeback,” said Howard Cure, director of municipal research at Evercore Wealth Management.
While lower-rated municipalities still might buy guarantees to reduce borrowing costs, many investors are adapting to buying bonds without the backing of companies like MBIA Inc. and Ambac Assurance Corp., which were stripped of their top credit ratings because of losses on guarantees of subprime-mortgage-backed debt.
“The longer you go without that 50 percent penetration, the more investors are going to get used to the idea they probably don’t need insurance,” Cure said at the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Assured Guaranty Co., now the biggest municipal-debt insurer, backs about 9 percent of the market, Cure said.
Scarcity of capital is a barrier to entering the municipal-bond insurance business, said Cure, who formerly worked in the industry. New York-based Evercore Wealth Management oversees about $1.5 billion.
The need for insurance is also declining because credit-rating companies have adjusted their scales to bring municipalities more into line with corporate debt, said Cure and Richard Ciccarone, managing director and chief research officer of McDonnell Investment Management LLC in Oak Brook, Illinois, which owns $7 billion of municipal bonds. That led to upgrades for many public borrowers.
Work to Do
“There’s work out there for them to do,” said Ciccarone, referring to municipal insurers. “There is a reason to have insurance. The issue is how much insurance. Does the market want to go back to 50 percent? I don’t think there’s anybody going over 50 percent,” Ciccarone said.
There’s a need for insurance on some lower-investment-grade credits, to get access to the capital markets, he said. Insurance companies can also defend bondholder rights in instances of default, he said.
Warren Buffett, whose Berkshire Hathaway Inc. tried to gain business after the demise of MBIA and Ambac, has started to back away from the market, said Matt Fabian, managing director of Concord, Massachusetts-based Municipal Market Advisors.
“So long as Warren Buffett says it’s a bad idea, most private equity managers won’t allocate to that trade,” said Fabian.