Build America’s First Deal Saves Schools $1.25 Million
Build America Mutual Assurance Co. became the first new insurer to back local-government debt since Warren Buffett’s Berkshire Hathaway (BRK/A) Assurance Corp. in 2007, saving Pennsylvania taxpayers more than $1 million in its debut.
The company is standing behind a $10 million deal by York Suburban School District, with RBC Capital Markets managing the issue, data compiled by Bloomberg show. The insurance lowered borrowing costs by about $1.25 million on a present-value basis, said Dennis Younkin, the district’s director of finance and support services.
“This was really an ideal candidate to go to market with BAM,” said Ken Friedrich, manager of municipal sales trading and syndication at RBC in New York. “We’ve seen evidence of a need for another insurer in the marketplace and we definitely think there is interest.”
Issuers buy insurance to piggy-back on the companies’ higher credit ratings. Insured municipal debt made up a record 57 percent of the market in 2005, according to Bank of America Merrill Lynch. That fell to about 4 percent after the 2008 financial crisis cost insurers their AAA grades and left Assured Guaranty Municipal Corp. as the sole company writing policies.
Build America Mutual is rated AA by Standard & Poor’s, its third-highest ranking. The company’s entrance may lead to a re- emergence of bond insurance that could climb to 30 percent of new sales, David Veno, an analyst at S&P, wrote in a July 23 report.
“We are pleased to have completed our first insured transaction,” Sean McCarthy, the chief executive officer of the New York-based company, said in a statement. “We look forward to providing insurance for many similar bond issues in the months and years ahead.”
The York Suburban School District represents the company’s focus on “small to medium-sized issuers of general-obligation or essential public-purpose revenue bonds,” McCarthy said.
S&P rates the school district A, sixth-highest, according to a Sept. 10 report. Its “expenditures have begun to outpace revenues and are ultimately diminishing the district’s once-good reserve levels,” the company said.
For Build America Mutual, the Pennsylvania deal “is right in their wheelhouse,” said Alan Schankel, head of fixed-income research in Philadelphia at Janney Montgomery Scott. Still, it will take deals of greater size to assess the benefit of the insurance, he said.
The portion of the school district’s sale maturing in 2022 was priced to yield 2.23 percent, data compiled by Bloomberg show. That was 0.49 percentage point more than the interest rate on benchmark 10-year AAA securities, the data show.
Investors will be watching how the deal prices, said Stephen Winterstein, chief municipal strategist at Wilmington Trust Investment Advisors, which manages about $4 billion of munis. Insured local-government debt will be looked at “through a different lens now,” he said in an interview.
Investors may need more than the four years since the credit crisis to regain confidence in bond insurance, said Winterstein, whose Wilmington, Delaware-based company is about 75 miles (121 kilometers) east of York County, where the district is located.
“The question is: Has the chain of trust been broken between the investor and the monoline insurance industry?” he said. “My fear is it has been.”
For the York district, the savings prove the worth of having insurance, Younkin said.
“It’s interesting that this is an issue and we’re the first ones to actually take advantage,” he said. “We’re OK with the decision to have insurance.”
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