There are two main insurance companies in the municipal bond space: Build America Mutual Assurance Company and Assured Guaranty Municipal Corporation. Currently, both have ratings of approximately “AA”, which means that they can potentially add value to bond issuances for borrowers whose credit rating is “A+” or below.
The WM Financial Strategies website details the history of bond insurance from the days when there were many highly rated insurance companies through to the 2008 financial crisis. The 2008 crisis devastated the insurance companies’ investment portfolios, thus drastically reducing their credit rating to today’s bond insurance market.
The Association of Financial Guaranty Insurers website provides information on the current bond insurance market players.
What’s important here?
Lower credit rated borrowers can increase the creditworthiness of their bond issuance by attaching bond insurance. When bond insurance is attached to a bond, the investor’s credit concerns transfer from the borrower to the insurance company, since the insurance company will step in and repay the debt should the borrower default.
