Capital Guaranty Insurance Co. yesterday offered secondary market bond insurance through a new method patterned off a system launched in March by Financial Guaranty Insurance Co.
Capital Guaranty requested bids for $20 million of insurance for New York City general obligation bonds at 2:05 p.m. The offering differed from FGIC's auction in two major ways: Capital Guaranty limited capacity to $5 million for any one bidder; and the firm is allowing investors 24 hours to submit their bids.
FGIC's program imposed no capacity limits and kept the time frame for bidding to four hours.
Robert M. Kessler, senior vice president and chief underwriting officer at Capital Guaranty, said the offering is the first time the San Francisco-based bond insurer has publicly offered secondary market capacity. The volume limits and longer time frame, he said, were included to ensure fairness.
"We believe it's the fairest way to allocate it," he said. "In the past, we were never really big in the secondary market program."
New York City GOs are perhaps the most profitable credits for insurers to enhance in the secondary market. The price spread between regular, uninsured bonds and insured issues is wider than any other comparable issue, insurance officials say, which leaves profits on the table for both investor and insurer.
Capital Guaranty also announced a minimum bid of $40 per bond. Currently, industry executives say, the insured spread is about $75 per bond. Capital Guaranty's margin, however, would be somewhat lower because the company's insured bonds trade slightly below that of other insurers.
Capital Guaranty has an AAA from Standard & Poor's Corp. The absence of an Aaa from Moody's Investors Service has been cited in the firm's lower-tier trading range.
The insured/uninsured price spread on New York City's long end has been narrowing recently, as yields have been trimmed in the fixed-income run-up of the past few months, according to Carl Dincesen, first vice president of secondary markets at AMBAC Indemnity Corp.
"The spread on New York City GOs has declined significantly in the last few months," Mr. Dincesen said, "although it's stayed the same in the middle maturities."
The results of the auction will not be known until 4:00 p.m. today, two hours after the bidding deadline. Mr. Kessler said, however, that qualifying investors are likely to be notified soon after 2:00 p.m.
Market participants have criticized the system as being too time-consuming for dealers and traders, who usually act on very short notice and know the results of their trades instantly. Auctions hold out the possibility that a block of bonds isolated for insurance may not receive the enhancement, and trading opportunities elsewhere might be lost.
Mr. Kessler rejected the assertion. "I would disagree," he said. "Most people feel that it's an optimum time frame. They have a lot of bonds sitting there in their portfolio that don't need to be transferred quickly. There's no particular rush."
FGIC, meanwhile, reverted to its original first-come, first-serve secondary market system on Wednesday, offering approximately $100 million of capacity for the Philadelphia Intergovernmental Cooperation Authority's first deal, a $474 million issue.
"Market demand did not warrant the use of FGIC-Bid to ensure fair and equitable distribution of capacity," said a spokesman for FGIC.
