William deSante of Moody's Investors Service was elected the top credit enhancement analyst for the second year in a row.
Mark H.S. Cohen of Fitch Investors Service, a relative newcomer to municipal analysis but not to bond insurance, gave deSante a real run for the money, as he closed the gap toward the end of the voting.
Bank Facilities Fewer, Softer, Costlier
DeSante observed that several important trends emerged over the past year.
The first trend is a tightening in the availability of banks' credit enhancements and increasing fees for the banks' facilities.
In keeping with reduced availability from the banks, there is a movement toward "softer credit facilities", with bank lines of credit or revolving credit facilities being used instead of letters of credit, he said.
DeSante also noticed a blending of hard and soft credit enhancement facilities for issuers.
"I look at the bank facilities and how they fit into the bond deals," deSante explained.
Specifically, he emphasized the importance of reviewing the incentives for the banks to perform, as well as the outs provided to banks.
Stronger issuers can benefit from the use of soft credit facilities, because they are not as costly as letters of credit.
DeSante looks favorably on the fact banks are being fairly cautious about providing their facilities.
Additionally, he noted that pricing has improved in the letter of credit enhancement sector and the market has a better balance between Japanese, U.S. and European banks.
"We're hearing reports that some deals cannot find credit enhancements from banks," deSante said, "which is probably a good sign.
But, it may mean that credit enhancements from banks will not be as prevalent.
On the insurance front, deSante noted the continued strenth of bond insurers and a corresponding increase in the volume of municipal bonds using insurance.
DeSante continues to look at the bond insurance companies' exposure and their expansion into new markets.
"International exposure may become more of a critical issue in 1991," he added.
The exposure of the various bond insurers is reviewed, in terms of size and types of issues.
As the overall municipal bond market matures, the lessons learned about the various types of deals are incorporated into deDante's analysis.
He noted an uptick in the amount of analysis being conducted by municipal analysts on the bond insurance companies.
"I believe this is a good year for municipal analysts to reflect on the true nature of the risks of some municipal bond deals and how they may play out in a municipal bond insurer's portfolio," deSante said.
"This is a good testing period for analyst to see how different issues perform because the stress is fairly even across all sectors of the market," deSante said. Overall, he believes the expertise of the analysts community is growing, which means greater understanding about what various risks mean to the insurers. "Analysts should understand what bond insurance can and cannot do," he said.
On the horizon, deSante noted a movement afoot in the municipal bond industry to increase the use of short-term paper in the primary markets.
Presently, the short-term paper is created as a derivative security which is changed from fixed rate to floating rate debt in the secondary market.
The paper is overcollateralized, for stronger issuers, or backed by a soft credit enhancement facility from a bank, he explained.
"Issuers could create the short-term paper at the time of sale," deSante said, which would expand the bank credit enhancement sector.
Surveillance Critical At Insurers
DeSante said that the surveillance performed by the bond insurers has become more important over the past year and will continue to grow in stature over the near future.
"As insurance portfolios grow to such large sizes, the ability to monitor and control the exposures becomes more important," he added.
Several institutional investors mentioned that deSante is respected for his diligence in reviewing all of the deals that are done by the companies Moody's rates.
"By keeping up with all of the deals done by the insurance companies, you see a large percent of the market, which allows you to better gauge the impact of marginal changes," deSante said.
In turn, the broad-based understanding helps him to better evaluate the insurers.