Insured bonds bolster credit quality

The business of constructing and maintaining America’s infrastructure is indeed costly. According to the Federal Highway Administration, the estimated cost of constructing one mile of a new four-lane interstate highway can range from $9 million in rural areas to more than $39 million in urban areas.

Consequently, the ability to raise capital at competitive rates in order to finance infrastructure construction and improvements is especially valuable.

Both general obligation bonds and revenue bonds provide local governments with options for raising needed funds, but neither choice has proven to be the complete solution for all projects.

Revenue bonds do not require voter approval because they are secured by fees generated by the project itself, but their marketability is not always reliable.

Access to the capital markets requires more than just a stream of revenue, as investors can be concerned with the credit quality of revenue bonds.

Credit quality for revenue bonds depends on several characteristics: the level of demand for the facility, the financial operations of the authority responsible for managing the project and the legal structure securing the bonds.

Bond insurance offers a way to enhance the credit quality and marketability of bonds. Many city and local governments are using bond insurance to address the credit quality concerns of investors, as well as risks associated with the financing of some infrastructure projects.

Municipal bonds going to market with insurance have steadily increased over the past decade. In 1995, 44 percent of all new municipal bonds brought to market were insured, compared to around 23 percent in 1985. Municipal bond insurance provides both issuers and their municipal investors with several benefits:

* Guaranteed full and timely payment of principal and interest. The strength and stability of a municipal bond insurance company is determined by its ability to provide payment of principal and interest on a bond if the issuer is unable to do so.

This claims-paying ability is analyzed and evaluated by the leading rating agencies. Bond insurers have received the highest rating (triple A) from at least one of these rating agencies;

* Insured bonds are highly marketable. Their marketability is enhanced by the insurer’s claims-paying ability. For investors, bond insurance simplifies the process of selecting investments, as analysis has already been conducted by the insurance company in deciding to underwrite the transaction.

By contrast, investors who purchase uninsured bonds bear the risk of potential rating downgrades that can affect the value of their investment; and

* Issuers save money. Because bond insurance provides an unconditional guaranty of payment, investors in insured bonds demand less yield on their local government investment. Lower interest rates translate into borrowing-cost savings for local government issuers.

For instance, issuers in the toll road revenue bond sector typically realize minimum interest rate savings of 10 basis points to 15 basis points, with one basis point being 1/100th of a percent. That adds up to hundreds of thousands of dollars in savings.

For example, a toll road of average credit quality, issuing $100 million in bonds maturing over 30 years, can save as much as $600,000 in current dollars after paying the cost of the insurance policy.

In an environment of rising infrastructure financing costs and limited funds to meet these costs, bond insurance continues to assist municipal issuers in achieving access to credit markets and borrowing-cost savings on their financings.