Build America Mutual Assurance’s announcement that it is entering the bond insurance business should be viewed as a positive, but hospitals looking to sell bonds are not going to like what they hear from the new insurer.
In A Nutshell…
- Bond insurance was decimated in 2008-2009, leaving Assured Guaranty as the only insurer to actively write new policies
- Bond insurance has been largely ignored by hospitals due to already low rates and limited net savings
- BAM’s entrance expands the playing field, but the startup will not insure hospital revenue bonds
Earlier this week, New York state regulators announced they have licensed Build America Mutual Assurance Co. (BAM) to insure municipal bonds in 26 states. BAM expects to start operations in September and ultimately plans to be licensed in all 50 states.
S&P rated the BAM “AA” with Stable Outlook. The new company said they had discussions with Moody’s, but since Moody’s did not issue a rating, it’s a safe bet the discussions did not go the insurer’s way. Moody’s took the opportunity yesterday to call BAM a “mixed blessing” for the industry, saying that the new company may help revitalize bond insurance, but that insurance is not ideal for many borrowers given how low rates are.
But hospital CFO’s planning on issuing new debt need not reach for the phone. BAM says it will not guarantee private 501(c)(3) hospital bonds. Instead, the new insurer will cater to what it calls essential public purpose bonds: schools, utilities, transportation and other core governmental functions. This leaves Assured Guaranty’s status intact as the only insurer of new hospital bonds.
The bond insurance industry once guaranteed more than half of all municipal bonds, but was decimated in 2008-2009. When the dust settled, Assured Guaranty was the only insurer left standing. Assured continues to offer new policies to healthcare borrowers, but has been largely ignored by hospitals: so far this year, Assured has insured only 5 hospital bond issues. To be fair, hospitals have not sold a lot of bonds lately, insured or not.
Hospitals and other “non-essential” borrowers scorned by BAM may find consolation in the fact that bond insurance doesn’t provide as much value as it used to, for a couple of reasons.
First of all, interest rates are obscenely low. The 30-year MMD Index hit a record low of 2.79% yesterday. At these levels, there is very little room left for yield savings after factoring bond insurance premiums into the equation.
Secondly, institutional investors no longer rely solely on Assured Guaranty’s high ratings to set yields. After the bond insurance industry collapsed, investors stopped taking bond insurance at face value and started pushing for higher yields based on the borrower’s so-called underlying ratings. This has further eroded the value of bond insurance.
As rates rise and the net savings from bond insurance become more substantial, other players may enter the healthcare sector. It’s also possible than BAM will change its current underwriting guidelines and start calling on hospitals.
Also read our related article Is There a New Bond Insurer In Town?