Build America Mutual Assurance Co., the first mutual bond insurer guaranteeing state and municipal debt, was licensed by New York State’s insurance regulator.
With $600 million in initial financing and Standard & Poor’s third-highest ranking of AA, the company will operate as the nation’s highest-rated bond guarantor, New York Governor Andrew Cuomo said today in a statement with the state’s Department of Financial Services. The insurer will be owned by its issuers and insure municipal bonds of as much as $75 million, according to the statement.
Build America, which plans to issue its first policy in September, will help “small local governments raise the funds they need to build necessary projects, while saving taxpayers’ money,” Cuomo said in the statement.
Bond insurers charge cities and states upfront premiums in exchange for a promise to support their debt in a crisis. That saves municipalities money because investors demand lower interest rates on bonds backed by highly rated companies.
The collapse of the U.S. housing market four years ago saddled bond insurers with losses on mortgage debt after they ventured beyond municipals to insure some of Wall Street’s most toxic securities. The companies are still untangling the legacy of the faulty home loans that left the industry without any top-rated insurers after defaults began to soar. Assured Guaranty Ltd. is the only company left offering insurance in the $2.8 trillion U.S. municipal-bond market.
Hudson-Greenwich Partners LLC, a partnership founded by Robert Cochran and Sean McCarthy, announced its intention last year to create the insurer. Cochran co-founded Financial Security Assurance Inc., once the largest insurer of municipal bonds before being acquired by rival Assured Guaranty. McCarthy was Hamilton, Bermuda-based Assured Guaranty’s chief operating officer after it bought FSA in 2009.
Build America will back investment-grade general obligation debt or “other revenue bonds issued to fund essential governmental facilities and services,” according to the statement. The company said it won’t back structured securities like the mortgage debt that led to losses for the industry.
The financial services department “will closely monitor BAM to safeguard against the problems that the bond insurance market encountered during the height of the economic crisis,” Financial Services Superintendent Benjamin Lawsky said in the statement.
S&P stripped Assured Guaranty of its AAA rating in October 2010, the last in the industry after MBIA Inc. and Ambac Financial Group Inc. lost the top ranking in 2008.