The Municipal and Infrastructure Assurance Corporation (MIAC), a start-up monoline insurer backed by Australian investment bank Macquarie Capital and alternative asset manager Citadel, has been fast-tracked for a licensing pilot project that will enable it to commence operations more quickly.
Under the pilot licensing program, the National Association of Insurance Commissioners will expedite MIAC’s application to become a licensed monoline insurer in all 50 US states and six territories. Presently, MIAC is only licensed in New York state.
A monoline insurer or monoline guarantees repayment of bond principal and interest in the event that its insurer defaults. As a result, bonds that are insured, or “wrapped” by monolines, have traditionally been given higher debt ratings and traded at a premium to non-insured securities.
MIAC is the second bond insurer to participate in the pilot program after Warren Buffet’s newly formed Berkshire Hathaway Assurance Corporation.
Both firms were created to fill a void left in the US monoline insurance market when Ambac Financial and MBIA, key players in the industry, were downgraded last year due to losses they incurred from the insurance of structured products backed by US residential mortgages.
The downgrades resulted in a simultaneous downgrade of debt issued by thousands of municipalities in the US, wreaking havoc on the US municipal bond market, which had long relied on monolines as a tool for lowering their cost of borrowing.
Under its charter, MIAC is permitted to insure bonds issued by municipal issuers as well as private issuers of bonds linked to infrastructure projects, but it is prohibited from insuring structured products of the kind that caused Ambac’s and MBIA’s downgrades, such as collateralised loan obligations. Its major focus will be on municipal issuers.
“We plan to deploy our significant capital base against sound municipal risks, to assist states, cities and municipal authorities lower their cost of funding for important public infrastructure and related projects,” Rick Kolman, executive vice chairman of MIAC, said in a statement.
Kolman, former co-head of the municipal bond department at Goldman Sachs, shares MIAC’s board with several high-ranking Macquarie Capital executive directors, including Fred Forni, Duncan Murdoch, Tim Bishop, James Wilson and Brendan Duval. Division directors Matthew Lancaster and Tobias Bachteler also sit on the board along with associate director Amanda Wallace.
Macquarie incorporated MIAC in August 2008 in New York. In September, the firm passed an examination report which indicates that MIAC is 100 percent controlled by Macquarie and capitalized by Macquarie affiliates at slightly above the minimum statutory level of $75 million. The firm had no liabilities as September.
MIAC intends to be capitalised at a level that is “demonstrably ‘AAA’ and which is multiples above its statutory level of $75 million”, according to its latest corporate fact sheet. Citadel has committed to financing MIAC, but its precise commitments have not yet been disclosed.
MIAC will commence providing municipal bond insurance and underwriting once it receives its credit rating.