Commentary on Moody’s Rating Change of Bond Insurer Assured Guaranty Municipal Corp. (AGM)
Municipalities can sometimes lower their borrowing costs by purchasing bond insurance. In exchange for making payments to an insurance company, the bonds receive the rating of the insurer rather than the issuer if the insurer’s rating is higher – and this means that the municipality can pay a lower yield and save money. Before 2008 most bond insurers were AAA-rated, making this an easy decision for issuers and a lucrative income stream for the insurers.
Assured Guaranty Municipal Corp. (AGM) is currently the larger of only two municipal bond insurance companies still writing new business. Municipalities are cutting spending wherever they can and are generally issuing fewer bonds. This will continue to decrease AGM’s revenues. AGM is also an affiliate of a larger insurance company which was also in the mortgage guaranty business. Moody’s downgraded AGM’s affiliates due to the continuing slow recovery of the mortgage business, though all remain at the “investment grade” level.
With AGM’s affiliates downgraded and its own revenue stream crimped, Moody’s essentially had no choice but to downgrade AGM two notches from Aa3 to A2 – still investment grade. Any municipal bonds AGM insures were also automatically downgraded unless their own ratings remained higher than AGM’s new rating. The downgrade therefore does not imply any negative change in the underlying ratings of the bonds themselves, only that the insurer’s rating has declined.
AGM was one of the largest insurers of municipal bonds and some of those bonds may be held by your clients, either from our purchase in an Income Portfolio or as pre-existing holdings. We are recommending that each bond insured by AGM be monitored on a case by case basis but, in light of the circumstances, no “wholesale” action is needed at this time. If we feel that any individual bonds owned by your clients require action, we will notify you by e-mail along with a recommendation specific to that bond based on its position in the client’s overall portfolio.