NEW YORK ( The Deal) -- After getting sucked into major municipal bankruptcies that include the City of Detroit, the City of Stockton, Calif., Jefferson County, Ala., and the City of Harrisburg, Pa., bond insurer Assured Guaranty (AGO - Get Report) made a bold move Monday, announcing that it has started a new subsidiary to underwrite the risk of even more municipal bonds.
Some observers believe these bankruptcies will make municipal bond insurance look all the more attractive to bond investors, increasing demand for their products.
"It's somewhat ironic, but the situation in Detroit could end up being a positive for Assured Guaranty and
On July 22, Assured opened a new subsidiary, Municipal Assurance Corp., that will focus exclusively on U.S. municipal bonds. The new subsidiary is jointly owned by the insurer's existing municipal subsidiary, Assured Guaranty Municipal Corp., and Assured Guaranty Corp. MAC's parent subsidiaries gave it $1.5 billion of claims-paying resources and capitalized it with $800 million in cash and securities.The parent subsidiaries also gave MAC some of their existing business. MAC will focus on healthy bonds, leaving the riskier plays to Assured Guaranty Municipal. Standard & Poor's Ratings Services gave MAC a rating of AA-, while brand-new Kroll Bond Rating Agency pegged it at AA+. It remains to be seen how Detroit's bankruptcy will affect the insurers of its bonds, although sources expect that the bankruptcy court will treat them more favorably than Emergency Manager Kevyn Orr did in his scuttled June 14 restructuring plan. Orr's plan took the unusual step of classifying Detroit's general obligation bonds, which are generally viewed as extremely safe since they are backed by a pledge of city revenue streams, as unsecured debt. "Detroit's default and restructuring plan are credit negative for bond insurers," Moody's Ratings Service trumpeted in a June 24 report, citing the plan's unusual credit structure that would give holders of general obligation bonds a big haircut -- which bond insurers would be expected to make up.