Fundamental changes in how European communities finance infrastructure projects are providing growing opportunities for American municipal bond insurers.
By most accounts, a European municipal market similar to the U.S. tax-exempt market will be slow to develop, but at least three bond insurers already have a foot in the door.
Structured finance investors and issuers in Europe have long been familiar with Financial Security Assurance Inc. and Financial Guaranty Insurance Co. The two firms, along with Municipal Bond Investors Assurance Corp., are beginning to participate in the European municipal market.
Roger K. Taylor, managing director at FSA, the first municipal insurer to open an office in Europe, said decreased subsidies from central governments are prompting European municipalities to consider selling bonds in the capital markets.
"What you're seeing in Europe and elsewhere is a decentralization of responsibility for infrastructure finance from the central government down to the smaller regional entities," Taylor said. "As that responsibility is being pushed down, [local governments] are looking for ways to structure financing without direct subsidies from the central government."
The most likely options available for these localities are the banks and capital markets, but the long-term nature of infrastructure projects makes bank financings uneconomical, he said.
"Banks won't have the capacity for the huge amount of infrastructure financing that needs to be accomplished," Taylor said. "And the structure [of bank financings] is not always consistent with the underlying projects being built."
In the United States, the local government bond market developed around the incentive of tax exemption, which is not available overseas. Officials involved in the nascent European efforts say the markets there seem to be driven by the unmet demand of institutional investors for long-term securities like the ones the localities are beginning to offer.
In it most recent transaction in Europe, FSA last month provided the backing for a private placement of $125 million of fixed-rate amortizing notes issued by the Barcelona Holding Olimpico SA. The issue consisted of $115 million of 10-year notes and $10 million of five-year notes.
In May, MBIA became the first monoline insurer to back a transaction by a French local government, insuring a 100 million franc, or $18.7 million, offering by Departement du Nord. Since then, MBIA has backed two more French borrowings: a 150 million franc refunding issue by Departement de LaMeuse and a 400 million franc deal by Ville de Lille.
Interest in issuing traditional municipal bonds, and backing them with bond insurance, has been particularly evident in Spain, France, and Germany, Taylor said, but regulatory issues must be addressed before the market can grow dramatically.
Regulatory shortcomings vary from country to country, but throughout Europe there is a need for the development and refinement of guidelines allowing localities legally issue bonds.
The regulatory process "isn't going to happen with lightning speed, but it's inevitable," Taylor said.
Since the opening of its MBIA Assurance SA subsidiary in 1991, MBIA has focused its attention on France, but the largest municipal bond insurer is also looking for opportunities elsewhere in Europe.
"We think that we are extremely well positioned to capitalize on the new public finance opportunities in Europe, and we are exploring transactions not only in France but in other European countries," said Richard L. Weill, executive vice president at MBIA. "The same factors that are already in existence in France are to some degree either in existence or may exist shortly in other European countries."
With a system of municipalities that closely resembles that in the United States, generally strong credit trends, and a growing institutional investor base, France does seem to have a leg up on other European nations in the development of a municipal market.
"In France now, about 10% of public finance being done by local governments is done through he bond market," said Michael J. Maguire, president of MBIA Assurance. "Pushing that is the increased efficiency of capital markets and the possibility that local authorities will get better rates in capital markets than from banks."
Insurance officials agree that is has taken time to educate European municipal issuers and investors as to the benefits of their guaranties, but they say that the effort appears to be paying off.
"A lot of these guys haven't had experience in terms of accessing capital markets, but they're becoming much more sophisticated to the alternatives and to MBIA, FGIC, and ourselves," FSA's Taylor said. "We've got the products that are useful and that the market should want. We just need the regulatory situation to keep developing."
Despite its established presence in Europe's asset-backed arena, FGIC has yet to insure any municipal offerings there. Patrick O'Sullivan, general manager and director of FGIC's European operations, said the firm is taking a cautions approach to the market.
"Entry into the municipal debt market by local [European] authorities is relatively new," O'Sullivan said. "Domestically, responsibility for repaying municipal risk is enshrined in the constitution of each state, [but] in Europe it's not quite the same."
Still, the inability of central governments to subsidize the debt of municipalities is forcing local issuers to look at obtaining funding in the capital markets. FGIC is tracking developments in the market, and France, O'Sullivan said, "certainly looks the most promising."
The municipal sector in Europe "is becoming a very attractive market. Many characteristics, like the fixed-rate nature and amortization, seem to be the same as in the U.S.," he said. "There is no doubt the risk can be properly assessed, [but] we're only in the early stages of looking."
Spokespersons for AMBAC Indemnity Corp. and Capital Markets Assurance Corp. said their firms have not insured any municipal deals in Europe to date. Neither has Capital Guaranty Insurance Co., which has no plans to enter the European market, a spokeswoman said.
