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The National League of Cities and mortgage guarantor Radian Group Inc. (RDN) announced Monday they are partnering to explore the formation of a new mutual bond insurance company for debt sold by states and local governments.
The agreement is designed to make it easier for municipalities to access the credit markets in the $2.9 trillion municipal bond market. As a mutual insurer, the Radian-managed company would be owned by the issuers who purchase the insurance.
NLC sought up to $1.5 billion in federal seed money to get the idea off the ground nearly three years ago. But the group began looking to raise private capital in the face of reluctance by the federal government to participate.
Several aspirants have fought to break into the bond insurance market to replace guarantors like MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABKFQ) that saw their ratings collapse during the financial crisis because of their exposure to tainted mortgage-backed securities.
But few firms have successfully launched new companies. And none have been able to maintain top flight ratings from all three major ratings firms.
"A mutual bond insurance company with a public finance book of business would restore capacity that was lost," David Beidler, president of Radian's Asset Assurance Inc. unit, said in the statement. "The mutual insurance company structure, with the issuers as members, offers insurance to bondholders that the company will not deviate from its public finance mission."
Insurers collect a portion of bond principal at the time of issuance in exchange for a contractual agreement to cover any missed payments over the life of the bond.
The agreement with Radian assumes the company would be backed as a private-public partnership. In earlier iterations, NLC proposed private capital in a first-loss position, meaning it would be used first to pay claims. Neither NLC or Radian would say how much capital they are seeking to raise privately.
In June, Radian paid $82 million to acquire a New York based shell-company called Municipal and Infrastructure Assurance Corp. The shell company was founded by Australian investment firm Macquarie Group in unsuccessful big to start a municipal bond insurer of its own. Though it had not written any business, the shell company won regulatory approval to do so in 36 states plus the District of Columbia.
Radian's muni insurer in 2008 was forced to stop writing public finance guarantees to prop up a sister's company's mortgage insurance business.
Though Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) set up a municipal bond insurance company in late 2007, it stopped underwriting new policies largely because perceived risk. Specifically, Buffett argued a troubled municipality is more likely to default on its obligations if there is a bond insurer sitting between it and the bondholder.
-By Andrew Ackerman, Dow Jones Newswires; 202-569-8390; firstname.lastname@example.org