* Build America to start writing coverage in September
* Will focus on issues under $75 million
* Backed by former top executives of insurer FSA
* S&P rates insurer 'AA,' sees substantial market share
By Ben Berkowitz
July 23 The first-ever mutual municipal bond
insurer launched on Monday, with an endorsement from the
National League of Cities and a goal of bringing competition
back to a once huge market that nearly collapsed after the
Build America Mutual Assurance Co, started by two veterans
of the bond insurance industry -- and its recent turmoil --
received a "AA" rating from Standard & Poor's, which said it
expects the company to gain "very strong market penetration." It
is now the highest-rated bond insurer in the country.
Build America Mutual, or BAM, will focus on investment-grade
muni bond issues of up to $75 million when it starts writing
coverage in September, the New York Department of Financial
Services said in a statement after issuing BAM a license.
As a mutual, BAM will be owned by the issuers. The state
said the company was capitalized with $600 million in initial
One industry expert said BAM would be most useful for a
niche of the roughly $400 billion market.
"We believe that Build America Mutual's product will be
directly relevant to those smaller, irregular issuers that are
high quality, (but) because they're smaller and irregular --
there's a market for their product, but it isn't as robust as
for the larger household names that come several times a year,"
Chris Hamel, managing director and head of the municipal finance
group at RBC Capital Markets, said in an interview.
The new insurer is backed by two veterans of the business.
Robert Cochran and Sean McCarthy were previously chief executive
and chief operating officer, respectively, of bond insurer FSA,
which was acquired by Assured Guaranty in 2009.
Cochran serves as chairman and McCarthy as chief executive
of BAM. The new company's head of public finance and general
counsel are also FSA veterans.
The board of the company includes former Pennsylvania
Governor Ed Rendell and former New York Lt. Governor Richard
Ravitch, among others.
The new venture will compete with Assured Guaranty, which is
effectively the only bond insurer still writing new business in
the United States.
The once-robust business was all but crippled by the
financial crisis, as bond insurers that strayed from their
municipal routes into structured finance were slammed by losses.
While insured bonds accounted for more than half of the
market in 2005, just 4 percent of muni issues were insured in
the first half of 2012, though S&P on Monday estimated that
could ultimately rise to 30 percent or more.
"I view the entrance of a new monoline helping to broaden
the acceptance of the product," said Hamel, whose RBC unit is
the most active municipal bond underwriter by number of issues.
"The question is, does a third player try to enter the
market," he added, noting it was up in the air whether any new
entrant would follow BAM's mutual model or structure itself more
like a traditional bond insurer.
Many have tried to make a go of bond insurance in recent
years but to no avail. Warren Buffett's Berkshire Hathaway
set up a bond insurer that wrote some business and then
quietly stopped. Macquarie Group also took steps to
establish a business but sold it off to Radian Group without
ever writing a policy.
The National League of Cities, which considered forming its
own mutual bond insurer as far back as 2008, on Monday endorsed
BAM and said it would be the preferred provider of bond
insurance for NLC members.
Last September, the League, a non-profit association, said it
was working with Radian Group to explore setting up a
mutual bond insurer.
A League spokesman said in an email the endorsement of BAM
supplanted the arrangement the League made with Radian last
year, adding that the insurer had decided not to move forward.