Connie Lee Enters New-Issue Municipal Market; Private Insurers Can Expect Tough Competition
The College Construction Loan Insurance Association yesterday formally announced its entrance into the new-issue municipal bond insurance market, and Standard & Poor's Corp. affirmed the federally chartered company's triple-A rating for primary insurance.
The announcement heralds a new era for up to 18% of the municipal new-issue market. College Construction's operating subsidiary, Connie Lee Insurance Co., brings the force of the federal government to the teaching-hospital and education sectors, and private insurers can now expect tough competition for those bonds, say observers.
Oliver Sockwell, president and chief executive officer of Connie Lee, said the firm has been awash with inquiries from interested issuers. He expects the first Connie Lee-insured deal in about 30 days.
"Our pricing strategy will certainly be competitive," Mr. Sockwell said. "But it will be driven by our corporate objective ... to expand the availability of educational insurance."
On hand for the announcement was John B. Childers, deputy assistant secretary for higher education programs at the U.S. Department of Education, a 15% shareholder of Connie Lee. Mr. Childers said Connie Lee's entrance into the direct insurance market demonstrates the Bush administration's goal of developing "financial guaranty programs which increase private investment in education."
Mr. Sockwell said Connie Lee's involvement in primary issuance will open up an enormous market of borrowing for deferred maintenance and educational upgrade programs that otherwise might never have been addressed. He cited studies that estimate the nation's educational infrastructure will need $100 billion by 2000.
"We plan to have a significant positive impact in terms of resolving the financing problem," Mr. Sockwell said. "One hundred billion [dollars] is a huge challenge, but it's beyond the capacity of any one institution."
On Monday, Connie Lee completed a private preferred stock offering that resulted in the firm becoming a public-private coalition. In addition to the education department, the Student Loan Marketing Association owns 35% of Connie Lee and private investors hold 50%. The stock offering involved raising $55 million of new cash and Sallie Mae's selling a 10% stake to the investors.
The market-oriented development that allowed Connie Lee to proceed with its insurance program was Standard & Poor's confirmation of its AAA claims-paying rating. Connie Lee already had such a grade, but it was for reinsurance purposes, and a confirmation was required for the primary market.
The preferred stock sale brings Connie Lee's statutory capital to $101 million, from $50 million, according to Standard & Poor's.
David Penchoff, a vice president at Standard & Poor's, said the agency adjusted its assumptions to make Connie Lee's triple-A more difficult than the rest of the industry's. "As opposed to the other primaries, Connie Lee will be limited to the education-related financing, so they are penalized in the [depression-scenario] model," Mr. Penchoff said. "They have to have that much more financial strength to survive" the agency's capital adequacy test.
Mr. Penchoff said Connie Lee will be subjected to a higher "sector capital charge" on its entire portfolio, although the per issue charge at the time will be similar to the other insurers. Capital charges are rating agencies' methods of determining how much equity is used up by a given amount of exposure assumed.
Mr. Sockwell said education bonds themselves are inherently diversified. Educational institutions "get money from tuition, the federal government, states, enterprises, and charitable contributions," he said. "Their revenue streams are diverse to start with."
Mr. Penchoff added, however, that revenue-stream diversification "is not something we build into our [depression-scenario] assumptions."
Connie Lee does not plan at this time to acquire a Moody's Investors Service rating, Mr. Sockwell noted, because Standard & Poor's has been "quite sufficient" as a reinsurance rater.
In Connie Lee's enabling legislation, the firm was restricted from insuring the top three tiers of rated bonds, a move that was meant to preserve an already vibrant private market from federal involvement.
But, as reported in The Bond Buyer last June, Connie Lee will use a nonmunicipal rating service -- McCarthy Crisanti & Maffei -- to assess the insured portfolio for presentation to Congress.
Mr. Sockwell yesterday said the plans had not changed. "We use McCarthy Crisanti to evaluate the portfolio [and] satisfy the congressional mandate that the [issuing] institutions be other than the top three categories," he said.
In the reinsurance market, Mr. Sockwell expects to expand the use of triple-A providers, whether domestic or offshore, but such expansion is unlikely to take place soon. "We plan to use reinsurance, but we have plenty of capital now," he said. "We will use it initially on a facultative basis."