UPDATE 1-Rhode Island backs Calif. plan for new bond insurer
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By Joan Gralla
NEW YORK, March 28 (Reuters) - Rhode Island is inclined to support California's proposal to use state pension funds to create a bond insurer, saying more guarantors with top-notch ratings are needed to back the municipal bond market.
California Treasurer Bill Lockyer has cautioned that his idea for a new insurer -- which could rival a guarantor set up recently by Warren Buffett's Berkshire Hathaway Inc (BRKa.N) -- is still in the initial stages.
U.S. states, cities and agencies that sell municipal bonds could benefit from having another insurer because investors have lost confidence in some of the biggest companies in this industry. Some insurers have lost the highest "AAA" ratings this business requires due to profit-battering bets on the subprime mortgage markets.
"The more competition, the better that's supposed to be for consumers," said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer.
Lockyer, a Democrat, also wants credit agencies to equalize how they rate municipal and corporate bonds. Rating them differently forces tax-free issuers to pay billions of dollars more a year to borrow money -- though the $2.6 trillion muni market has a lower default rate than corporate bonds.
"If we get the rating reform we want, that would obviously reduce the need to insure bonds," the California spokesman said. But there still would be a need for bond insurance because not every municipality's credit would rise to "AAA."
Peter Kerwin, a spokesman for Rhode Island Democratic Treasurer Frank Caprio, said: "We are inclined to support Treasurer Lockyer's plan and look forward to seeing the details of his proposal."
Other state treasurers said they were still reviewing Lockyer's plan. The California treasurer already has discussed the concept with the $235 billion California Public Employees' Retirement System, or Calpers. Rhode Island's pensions total just over $8 billion.
Moody's Investors Service and Fitch Ratings have taken steps to address issuers' concerns and are weighing whether to harmonize their muni and corporate rating systems.
However, Standard & Poor's says it stands behind its present rating system. The agency said last week that municipal investors widely understand its method and that municipal bonds are already rated higher than corporate bonds, with 99 percent of all munis considered investment grade.
"While the initial move by Moody's to change their rating system is a positive step, we are open to any rating initiatives which will save money for Rhode Island taxpayers and help government entities finance vital infrastructure projects," the Rhode Island spokesman added.
About half of all muni bonds are insured, a practice that made it easier to sell this debt because investors were assured they would always be made whole if there were any defaults. But once credit agencies began cutting the ratings of bond insurers, investors started selling billions of dollars of the debt they had guaranteed.
The waves of selling swamped dealers and caused two floating-rate markets to freeze -- the $330 billion auction rate market and the $400 billion variable rate demand note market. So U.S. states, cities and authorities have been forced to pay higher interest rates for much of this year -- just as the national economy slows, crimping their tax revenues. (Reporting by Joan Gralla; Editing by Frank McGurty)
