Mon Jun 1, 2009 9:01am EDT
By Lilla Zuill
Municipal and Infrastructure Assurance Corp (MIAC), the New York-based insurer formed by Australia's Macquarie Group Ltd (MQG.AX) and Chicago hedge fund Citadel Investment Group over the last year, is in the final stages of its launch, having won licenses in several major states and with strong support from issuers, said Rick Kolman, executive vice-chairman, in an interview last week.
"We are active in the marketplace, preparing people for our business," said Kolman, who joined MIAC last year from Goldman Sachs (GS.N)."We are on a parallel path while we are waiting for the ratings," he added, meeting with prospective customers and employees.
The company, in talks with Standard & Poor's, Moody's Investor Services and Fitch, expects to officially launch as soon as it receives ratings from one or more of these agencies.
"We would anticipate some time this quarter or in the third quarter we will be able to open our doors," said Dennis Dammerman, a retired General Electric (GE.N) finance chief who is MIAC's chairman, in the interview.
MIAC, which already has a senior management team in place, will insure bonds issued by municipalities and infrastructure projects, steering clear of the structured financial products that badly hurt MBIA (MBI.N) and Ambac Financial (ABK.N), insurers that once dominated the market.
Kolman said MIAC plans to provide insurance to both large and small issuers, bringing much needed credit enhancement to Main Street projects that have had a hard time attracting investors since the marketplace contracted.
Bond issuers typically bought coverage in order to use the insurers' high credit ratings to drive down the amount of interest paid to investors. But last year when companies, which had also insured mortgage-related debt, lost their high ratings in the housing downturn, issuers were sent scrambling to pay rapidly rising rates.
The situation effectively left just one carrier -- Assured Guaranty (AGO.N) -- to service roughly two-thirds of the market. For that reason, MIAC's executives expect a warm welcome from buyers.
"Customers need diversification," said Kolman. "That alone will allow us to enter the marketplace very, very quickly."
MIAC has yet to disclose its capitalization, but Kolman said it will be more than sufficient to win top ratings.
ROOM TO GROW
The situation in the municipal credit market has become so dire that the National League of Cities, which represents municipal governments, earlier this month talked about creating its own bond insurer to be owned mutually by policyholders.
"The economic crisis has put state and local governments across the country under great financial stress," the League wrote in its proposal. "This stress imperils essential governmental services that people rely on and governments' abilities to pay for them."There had been hope the situation would ease when Warren Buffett's Berkshire Hathaway (BRKa.N) (BRKb.N) set up its own municipal bond insurer more than a year ago, but it has targeted investors in the secondary market, and done little business even there, citing price concerns.
Dammerman, who previously oversaw a GE-owned bond insurer, said pricing in the primary market appeared to be as good as or better than expected.
Indeed, he expects others to follow MIAC into the now lightly-populated municipal bond insurance market.
"It is our belief that as we get out there with private capital, others will follow," he said. "We don't have any illusions about that. We understand that if it looks like an attractive market to us, other people are going to be in there -- that's the world."
MIAC to date has won licenses in about a dozen states, including 4 of the 6 largest states by municipal issuance: New York, Texas, Illinois and Pennsylvania.
Kolman said MIAC is also very close to approval in 9 more states, and eventually expects to have a green light across the United States.
"We are only waiting on the ratings. When the ratings come in we are ready, willing and able" to launch," he said.
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