If you are considering buying municipal bonds, you will need to decide whether to buy bonds with insurance policies designed to protect your investment. Insured municipal bonds make up more than 15% of the principal value of all outstanding U.S. municipal bonds. This page will help you make an informed decision about the value of bond insurance in your municipal portfolio.
MAC bond insurance provides durable investment protection in a number of ways. For example:
Why you may want municipal bond insurance
While municipal bond defaults have been rare, they do occur, more frequently in periods of economic stress. Major municipalities, such as Detroit, Michigan; Jefferson County, Alabama; and Stockton, California have declared and exited bankruptcy. Assured Guaranty insured bondholders were fully protected in those and several other instances of default, and they did not have to deal with the prolonged negotiations and litigation such situations can involve.
The decision to buy insured bonds will depend on your circumstances and risk tolerance. Here are some questions to ask yourself and related reasons why you might prefer bonds with insurance:
"How well do I know the municipality’s fiscal condition and the structure of the bond?"
There are tens of thousands of U.S. municipal issuers, some quite small, and a wide variety of bond structures. Moreover, municipal financial reporting is not as timely or transparent as that of publicly traded companies.
Municipal budgets are complex, government’s fiscal health is sensitive to changing economic conditions, and every municipal issue’s documentation has its own precise (or, unfortunately, sometimes not so precise) language about where the money to repay the bonds will come from.
MAC insured bonds have been pre-selected for soundness by the guarantor’s trained underwriters, who have the resources to evaluate the unique risks of each issue and, in many cases, can negotiate stronger terms and conditions before the bonds are issued.
In general, each bond must fall within the limited range of bond sectors where MAC provides insurance, must be of investment grade quality before it is insured, and it must meet additional criteria based on the bond structure and other factors. Additionally, by choosing insured municipal bonds, you gain the benefit of a professional surveillance staff whose job is to keep tabs on the issuers of the insured bonds. In many cases, these professionals spot trouble ahead of time and can call upon, or even require, the municipality to take remedial steps before a default looms. And unlike rating agencies, guarantors back up their opinions with an obligation to pay interest and principal from their own capital if the issuer fails to do so.
"Would I be able to tolerate a drop in market value, or even the potential inability to sell my bonds, if a municipal issuer’s financial condition deteriorated?"
Although bond insurance does not guarantee a particular market value or market liquidity, distressed issuers’ bonds insured by highly rated guarantors have historically held their trading value better than comparable uninsured issues. For example, insured Louisiana bonds lost far less market value than uninsured bonds after Hurricane Katrina.
"If a municipality missed one or more interest or principal payments, could I afford to be without the cash flow for a number of years until I could obtain a recovery?"
If the issuer of an insured municipal bond fails to make a scheduled payment on time for any reason, the bond insurer is obligated to make prompt payment in full to the paying agent or trustee. The value of this benefit was evident during the prolonged efforts to resolve the incinerator debt problems in Harrisburg, Pennsylvania, as well as during Detroit’s bankruptcy. In these and other cases, insured bondholders continued to receive full and uninterrupted payments of principal and interest when due, even when the issuer failed to pay.
Assured Guaranty has shown strong commitment to fulfilling the timely payment obligation. When the trustee for certain Jefferson County, Alabama obligations refused to draw on the insurance policy, Assured Guaranty arranged to make interest and principal payments directly to the Depository Trust Company, where the ownership accounts were maintained.
How to obtain MAC bond insurance
You generally do not buy the insurance directly. Instead, you buy bonds that were issued with MAC insurance. (Issuers arrange to have their bonds insured in order to attract more investors and improve the efficiency of their bond offerings.) In addition, dealers may purchase insurance for uninsured bonds that are already trading in the secondary market. Dealers and financial advisors may be able to obtain insurance for lots as small as $50,000 for transactions executed through the TMC Bonds electronic trading platform.