In most cases, a bond insurer will continue to make debt service payments to bondholders over the life of the issue. In the event that a bond defaults or the underlying credit/issuer does not pay the debt service on a bond, the bond insurer pays the principal and interest. Simply stated, the bond insurance company insures the bondholder. Cost effectiveness can be determined by looking at present value calculations under different interest rate assumptions, with and without insurance. In fact, IRS regulations require computations that show the cost of bond insurance (premiums paid upfront, 5-15 basis points) is cost-effective in reducing an issuer’s borrowing cost. Issuers mainly use bond insurance because it reduces their borrowing cost. The use of bond insurance for liquidity facilities.The development and growth of auction-rate securities, many of which are secured by bond insurance.Bond insurance is usually a cost-effective product.An increase in the number of issues eligible for insurance.Bond insurance is attractive to retail investors.Bond insurance largely takes away the “story bond” features of complex issues since bondholders focus primarily on the bond insurance and not the underlying issue/credit.Bond insurance gives smaller issuers access to the market on better terms and can be cheaper than getting a rating.The use of bond insurance by issuers has been driven by several factors, including: By 1984, their market share had increased to about 20 percent, and it was up to 46 percent in 2007 before the decline in December.
In 1980, only about five percent of new municipal bonds were insured. Over the last two decades, the municipal bond insurance industry has experienced exceptional growth. This article provides an overview of bond insurance prior to its decline, how bond insurance is being used now and what might be expected in the future.įinancial guaranty insurance for tax-exempt bond issues is one of the oldest, if not the oldest, form of third party credit support or security for municipal bonds. Many questions exist regarding the value and utility of bond insurance and how this industry will reinvent itself after the turmoil is resolved. Since late 2007, the municipal bond insurance industry has been unstable as a result of their loss exposure to collateralized debt obligations (CDO’s) and related concerns.
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