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Assured Guaranty Ltd. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 9, 2010 12:31PM
Assured Guaranty Ltd. (AGO) filed Quarterly Report for the period ended 2010-09-30.
Highlight of Business Operations:
In order to help improve investor demand for municipal bonds and in order to strengthen capital project activity by state and local governments, the federal government authorized the Build America Bond ("BABs") program in April 2009 under the American Recovery and Reinvestment Act of 2009. This program, which helped state and local governments issue new bonds in the taxable market by providing a federal interest rate subsidy to the issuer, reduced new issuance in the tax-exempt municipal market in 2009 by 11.3% compared to 2008 and by 10.9% for the first nine months ended September 30, 2010 ("Nine Months 2010") compared to the nine months ended September 30, 2009 ("Nine Months 2009"). The BABs program, as currently structured, does not encourage issuers to employ bond insurance since the cost of bond insurance is not included as a component of interest cost in determining the interest cost subsidy paid by the federal government to the issuing municipality. In addition, the Company believes that the buyers of the BABs bonds are generally less likely than traditional municipal bond investors to require insurance due to the higher average rating and size of such bonds. From the introduction of the BABs program in April 2009 through September 30, 2010, approximately $137.3 billion of new issue municipal bonds were under the BABs program, but only 2.4% of these were insured by AGM or AGC. However, as smaller and lower rated issuers begin to issue BABs bonds and as individual investors begin to buy BABs more, issuers may purchase financial guaranty insurance more frequently in order to improve the efficiency and cost of their BABs issuance. For example, while AGC and AGM's utilization by BABs issuers on a par basis has been low to date, their utilization in three months ended September 30, 2010 ("Third Quarter 2010") based on the number of transactions was 8.4%, or 40 out of 475 transactions. The BABs program is currently scheduled to expire on December 31, 2010.
Another change which has affected the municipal market and demand for financial guaranty insurance has been the recalibration of municipal issuer ratings by two of the leading rating agencies, Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings ("Fitch"), in early 2010. This recalibration combined with the downgrade in AGC and AGM's financial strength ratings from Aaa by Moody's to Aa3 in December 2009 decreased the percentage of the market that had underlying Moody's investment grade ("IG") ratings lower than the Company's ratingsa key metric for evaluating the potential market for financial guaranty insurancefrom 67% to 26%.