NEW YORK — The biggest casualty of the crisis surrounding bond insurers might well be the insurers themselves.
Issuers and bond buyers alike might find it easier now to dispense with insurance, experts say, given that the finances of industry players such as ACA Capital and MBIA Inc. have come under strain.
"It may not be that important in today's market to get bond insurance," said R.J. Gallo, a portfolio manager at Federated Investment Management Co. who specializes in the municipal bond market. "People now realize that there are plenty more buyers for (municipal bonds) than was realized. The market is now broad and deep, and even if issuers have to give a bit more, they will be able to get their capital."
The "muni bond" market creates funds for such vital projects as sewage treatment systems, library expansions, sports facility overhauls and dam constructions. About $1.7 trillion worth of municipal bonds issued by more than 50,000 entities are held by investors, according to the Securities Industry and Financial Markets Association.
Most bond insurers carried excellent ratings until recently, and these companies were able to pass their strong ratings to the local entities they insured. This gave instant credibility to obscure borrowers such as local school districts and road-paving projects.
But recent disclosures about the insurers' strained finances and uncertain ratings prospects put the value of bond insurance in question.
Many cities, counties and states have excellent track records of avoiding default and might conclude they don't need the extra backing and expense of insurance, said John Flahive, director of fixed income for BNY Mellon Wealth Management.
On the other hand, nonprofit institutions like local museums and school districts with little history of issuing bonds are likely to end up paying higher premiums to investors. But they should be able to find investors to buy their bonds without insurance if they are willing to grant more attractive terms, according to John Nelson, a managing director in Moody Investors Service's public finance group.
Last week, Standard & Poor's downgraded ACA, a relatively small bond insurer, to junk status, making it unlikely ACA will be able to insure any more bonds. Previously, ACA held an investment grade "A" rating.
Only about half of muni issuances are insured, and if more credibility problems surface, the proportion could fall further, experts said. For instance, this week there is greater demand in the municipal market for uninsured bonds than insured debt, said Flahive.
"We existed a long time without municipal bond insurance, and we could continue to do so," Flahive said. He noted that local governments and institutions have been issuing debt for centuries but that bond insurance dates back only to around the 1970s.
In addition, the need for bond insurance in the muni market also might be undermined by the sector's low default rate, which makes its bonds superior to corporate debt in some investors' view.
Gail Sussman, a managing director at Moody's who analyzes government credit, said it is possible that in the current environment state and that local government issuers "could issue on their own, without any 'wrap' (bond insurance), if the 'wrap' does not make economic sense."