Today´s Bond Buyer has an article discussing a new bond insurer preparing to enter the municipal markets, attracted in part by the fact there is only one player left (Assured Guaranty/FSA).
Looks like “BondModel Co.” will be using a senior/sub pool structure to deliver insured bond payments to bondholders. This is a structure similar to CMOs (collateralized mortgage obligations) where each pool holds a number of underlying bonds with two types of investors: senior bondholders, and subordinated bondholders. In a default situation, the senior holders receive payments from the pool “tranche” ahead of the subordinated holders´ tranche. Given that they take a greater risk, sub holders get a higher yield than senior holders.
The structure works so long as senior holders are sufficiently over collateralized, but can fail in systemic crises as was recently the case with mortgages. It would seem that given the current monopoly, any additional choice for insurance will be supported by borrowers.
The question in our opinion, is whether bondholders will be as supportive.