Moodys downgrades Assured Guaranty
NEW YORK (Bloomberg) - Bermuda-based bond insurer Assured Guaranty Ltd, the municipal-bond insurer whose biggest investor is Wilbur Ross, was downgraded by Moody’s Investors Service, which cited the industry’s “dramatic decline” since the subprime crisis.
Moody’s cut the issuer rating of Assured two levels to Baa2, two steps above junk, the company said in a statement. Subsidiaries Assured Guaranty Municipal Corp and Assured Guaranty Corp had their insurance financial strength rating lowered two steps to A2 and three levels to A3, respectively.
Assured was the only company left insuring munis after MBIA Inc and Ambac Assurance Corp had their ratings cut during the financial crisis amid losses on guarantees of subprime-mortgage-backed debt. Though insurer Build America Mutual Assurance Co entered the market last year, just four percent of local bonds sold in 2012 had the protection, which once covered more than half the market.
“The economic proposition going forward is challenging because it costs so much more to buy bond insurance relative to the savings you can realise,” said Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC in Philadelphia. “I expect Assured Guaranty will have an even more difficult time maintaining market share.”
Municipalities have grown used to borrowing in the $3.7 trillion tax-exempt market without the insurance that once held down their interest rates, before the MBIA and Ambac downgrades sent floating rates soaring in 2007 and 2008. Local yields fell to the lowest since the 1960s last year.
Investors have reduced the value of bond insurance to “essentially zero”, said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh.
“Assured operates in an industry that has not recovered from the financial crisis,” Moody’s said. The company “will continue to struggle in the face of declining fundamentals, including a dramatic reduction in insurance usage, modest profitability and still-meaningful legacy risk”.
Ashweeta Durani, a spokeswoman in New York for Assured, declined to offer an immediate comment.
While Assured avoided the losses that felled its rivals, its stock plunged 90 percent from June 2007 to March 2009. Ross bought $250 million worth of shares in February 2008 and committed $750 million in capital to the firm. The billionaire’s WL Ross & Co owned a 10.2 percent stake as of September 30. Though the shares recovered in 2009, they are little changed from June of that year.
In trading on Friday, shares closed 2.7 percent higher at $15 in New York, after earlier falling as much as 4.45 percent. The stock is down four percent in the past 12 months, while the Russell 1000 Financial Services Index is up 22.2 percent, data compiled by Bloomberg show.
About four percent of the $363 billion of muni debt issued last year through December 13 was insured, according to Bank of America Merrill Lynch data.
Some investors are betting insurance could rebound. Build America Mutual, which began insuring bonds last year, is the first new insurer of local debt since Warren Buffett’s Berkshire Hathaway Assurance entered the market in 2007.
“We believe that bond insurance will continue to play an important role in the municipal market and created Build America Mutual to meet that demand,” Sean McCarthy, chief executive officer of Build America Mutual, said in a statement.
Moody’s put the units of Assured Guaranty under review March 20. Profitability over five and 10 years has “weakened notably”, trailing other specialty insurers, and will remain under pressure, Moody’s said.
Assured had already lost its investment-grade status in the eyes of investors, according to Moody’s Corp’s capital-markets research group. Its credit default-swap prices trade at levels implying the debt is rated B3, six steps below investment grade. The contracts have signalled the company should be rated junk by Moody’s Investors Service since August 2007.
The cost of protecting Assured Guaranty debt from losses climbed 0.4 percentage point to 2.1 percent upfront as of 9.03am in New York, according to data provider CMA, which is owned by McGraw-Hill Cos and compiles prices quoted by dealers in the privately negotiated market.
Credit swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
While Assured has modest debt, it may have “constrained” ability to access funds “on a cost-effective basis” if needed, said the Moody’s analysts, led by James Eck and Stanislas Rouyer.
Standard & Poor’s rates Assured Guaranty and Assured Guaranty Municipal AA-, fourth-highest, with a stable outlook.