UPDATE 4-Radian looking to form mutual bond insurance co

Mon Sep 26, 2011 2:43pm EDT

* Says new co may be backed by private capital

* Radian to act as management company

* Radian shares down more than 4 pct

* (Adds quotes, clarifies cause of insurance meltdown)

By Tanya Agrawal and Lisa Lambert

Sept 26 (Reuters) - Radian Group Inc is looking to form a new public finance mutual bond insurance company with the National League of Cities (NLC) in the hope of re-igniting a sector that burned out during the financial crisis.

NLC, a non-profit organization that represents civic leaders from across the country, has sought a collective form of insurance to replace the models that faltered during the credit crunch and to help small issuers.

"We've been working for over three years, looking at the whole question of the availability of bond insurance," NLC's Executive Director Don Borut told Reuters. "With the companies that were providing it basically losing their own ratings, there was a need (for this)."

Borut said Radian would act as the management company and help attract private capital to start up the firm. Bond issuers seeking to insure their debt would pay fees on top of their premiums. Over time, they will become owners.

"Over time, as bond issuers buy insurance and make payments into the company the risk to private capital will go down," Borut said.

In June, Radian closed on a deal to buy the dormant bond insurance operations of Macquarie Group for $82 million with an eye toward either writing new business or reinsuring existing exposure.

It had announced last February that its unit, Radian Asset Assurance, would purchase Macquarie's Municipal and Infrastructure Assurance Corp (MIAC).

Radian Asset insured municipal bonds and structured finance products until the third quarter of 2008 when it stopped writing new business, like many other insurance companies during the credit crunch.

Macquarie formed MIAC to fill a gap in the market. However, MIAC never actually wrote any business, despite having licenses in 36 states and Washington, D.C.

"The fact that it had already cleared some of the regulatory hurdles made it an attractive partner to the NLC," Borut said.

At one time, insured bonds made up about half of the municipal debt market, with issuers using the guarantees to push up their debt ratings.

Because of their exposure to shaky mortgage-related debt, most bond insurers, namely MBIA and Ambac , lost their top ratings during the credit crunch and financial crisis. Issuers backed off buying insurance.

The new company will have to have a rating of AA or better, Borut said. That could be difficult as issuers most likely seek out insurance that have lower ratings but the mutual insurance structure will rely on them to support the creditworthiness of the company.

"We're going to be selective as we begin this process that these are credible municipalities," Borut said.

By the end of 2010, issuers were only using one insurer -- Assured Guaranty Municipal Corp -- and only 6.2 percent of new debt sales were insured.

Assured was able to maintain its AAA credit rating from Standard & Poor's Ratings Services until last October. Currently, it is writing insurance for issuers rated A down to BBB that sell small amounts of debt.

NLC has found, though, that some demand still exists for insurance, especially from bond pools, Borut said.

Shares of Radian were trading down more than 4 percent at $2.11 in afternoon trade Monday on the New York Stock Exchange. (Reporting by Tanya Agrawal in Bangalore and Lisa Lambert in Washington; Additional reporting by Ben Berkowitz in New York; Editing by Supriya Kurane)

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