Three months after Financial Guaranty Insurance Co. agreed to "uninsure" bonds in the secondary market, competitors say they would consider the idea, too, but are skeptical that demand for such a transanction will amount to much.
FGIC has uninsured only one issue since announcing its "FGIC Release" program in April, according to the company.
From an investor's point of view, the option of earning a fee by dropping enhancement could be intriguing, particularly for improving credits in which the coverage is no longer deemed valuable.
Insurers say unwinding a policy might occasionally make sense for them as well, especially because doing so frees up small amounts of capacity and allows them to recognize unearned premiums on the bonds involved, bolstering yearend balance sheets.
But FGIC's competitors and other market participants, while not rejecting the concept out of hand, say they doubt that conditions making the transaction attractive to both insurers and investors would coincide very often, meaning "uninsurance" will probably remain a market novelty.
"We'd consider it, but we don't think there's a great market demand," said Bill Bonomolo, head of secondary market trading at AMBAC Indemnity Corp.
Mr. Bonomolo said AMBAC would uninsure an issue if an investor was interested and it made economic sense for the company, but so far that has not happened.
Officials at Municipal Bond Investors Assurance Corp. said they, too, are willing to unwind a secondary market policy if an investor requests it. But a firm official said MBIA has never done so, and he predicted the market for such transactions would remain small.
"We would uninsure an issue if it served the business interests of MBIA," Gary P. Karvelis, director of the firm's secondary market group, said in a prepared statement. "At the present time, we do not anticipate any significant activity in this area."
Financial Security Assurance is also considering the idea, but has not decided whether it would uninsure an FSA policy if such a request were made, according to a spokeswoman.
Michael F. Gallagher, a senior vice president at Capital Guaranty Insurance Co., said his firm would also consider the idea, but said there are less than a handful of issues outstanding that would possibly qualify. "I think it creates more confusion than anything else," he said.
The one deal has been executed was initiated by traders at Lehman Brothers in Los Angeles, who dropped FGIC's coverage on a bond issued by the Salt River, Ariz., Agricultural Improvement and Power District in exchange for a fee. Craig Brothers, a Lehman trader, explained that the insured issue was valued at the same level as the underlying credit, so taking FGIC's money made economic sense.
"I would think this would not become a common practice, because insurance does not add value to almost any bond," Mr. Brothers said. "But there are some bonds that are strong on their own.
Richard A. Price, a managing director at FGIC, explained that fees for the service are calculated based on the value of adding the bonds' unearned premiums to the firm's books, as well as on an assessment of the issue's credit quality. He declined to say what the fee was on the Salt River bonds, citing client confidentiality.
Several investors have been quoted fees to uninsure other bonds, Mr. Price said, but no others were accepted.
He added that FGIC does not expect the program will generate much volume. The initiative is simply an attempt to provide investors with more options, he said.
But Mr. Price said if the program does catch on, it would be over the next several months. "In this market, where spreads are collapsing between insured and uninsured paper, I would expect we would have more participants take us up on this product," he said.
One tax-exempt portfolio manager agreed the most likely candidates for such a program are improving credits, in which the spread between an issue's insured and uninsured bonds has decreased since the secondary market insurance was purchased.
"If the credit is improving, like New York City, the investor may be willing to take a fee because his perception is the credit no longer needs insurance," he said.
Another institutional investor said some of his bonds might be a better value without insurance, making the fee to drop coverage appealing. But he said most such issues were bonds insured in the primary market, which do not qualify for uninsurance.
