New Credit Opportunities

The bond insurance industry’s relentless penetration of the municipal bond market from the mid-1970s until its collapse in 2008, which peaked at about 60 percent of all municipal new supply, allowed for an unprecedented commoditization in the tax-exempt market. By taking credit out of the equation, bond insurance and other forms of credit enhancement also helped support the explosive use of leverage in the early 2000s, through the proliferation of Tender Option Bond programs (TOBs) on dealer desks and in private hedge fund vehicles. The more homogeneous the product, the easier one can margin it up. Of course, as we have since found out, credit risk never went out of the picture. It just morphed from individual credit risk to counterparty risk. Bond insurance was just a massive transfer of risk from the individual municipal issuers to the insurers.

Unrated, Formerly Insured Issues

The collapse of the bonds insurers in 2008 to 2009 has created a new opportunity for the credit investor: an entire class of formerly insured issues who never obtained a rating on their own. Many of these issues were purchased by entities such as community banks and mid-size property and casualty (P&C) companies, based solely on the credit enhancement. Many of these banks and P&C companies are now saddled with the unenviable task of figuring out what risks they actually have on the books. Many may find out they actually own non-investment grade paper, which they may have to liquidate ...

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