Standard & Poor’s recently downgraded National Public Finance Guarantee, but a view beyond the setback shows a company poised to reestablish itself as a major player in the new-issue municipal bond insurance market.
National, a subsidiary of MBIA Inc., was established in 2009 as a municipal-only bond insurer. It was created to separate MBIA’s muni bond business from its structured finance operations, which cratered during the Great Recession as a result of insuring mortgage-backed securities. When National was established, it took over MBIA’s municipal insured portfolio along with much of the parent firm’s capital.
Legal challenges to National’s separation from its parent have prevented it from writing new municipal business, as its rating fell in tandem with that of MBIA. Ironically, just as S&P issued its latest downgrade to both MBIA and National, barriers to reenter the muni market seem to be dissipating.
Resistance to National receding
Initially, 18 banks challenged the New York state insurance regulator’s decision to disassociate MBIA’s muni bond business from its mortgage-backed securities underwriting. However, the New York State Supreme Court has now rejected that challenge. Further, since the challenge was initiated in 2009, 16 banks have withdrawn from the suit, and some observers believe the remaining banks will either settle or drop the matter altogether.
Over the years, National has seen its rating drop in response to the weakened financial condition of MBIA Inc. In explaining the recent downgrade, S&P pointed to a $1.6 billion inter-company loan from National to MBIA Corp., which may not be repaid. Nevertheless, as of Dec. 31, 2012, National’s statutory capital was $3.2 billion and its claims paying resources totaled $5.7 billion.
Although it downgraded National from “BBB” to “BB” because of the inter-company receivable, S&P also assigned it a “developing outlook,” acknowledging that if National finally rid itself of its legal challenges, it would likely be able to raise additional capital, making the inter-company loan a lesser concern. If litigation and additional capital hurdles can be met, S&P said higher investment grade ratings would likely follow, allowing National to re-enter the new-issue municipal insurance market.
As National’s existing book of business was largely written when it had a “AAA” rating under its original MBIA name, more than 90% of its insured credits were of “A” or higher credit quality at the time of issuance, and relatively few of these credits have had to draw on MBIA’s insurance policies.
With this strong insured book and its legal troubles dwindling, National’s long road back to health may finally be at hand.