The market's insistence on valuing "natural" triple-A credits more highly than insured triple-As came under fire Friday at a luncheon sponsored by the Municipal Analysts Group of New York.

Robert R. Godfrey, executive vice president in charge of research and business development for Municipal Bond Investors Assurance Corp., said a recent study he conducted found the market undervalues his company's product.

"Insured bonds are a better secured bond for the investor than natural triple-As from a default standpoint," Godfrey said in an interview before his speech to the analysts' group. "Natural triple-As will not get through a depression scenario without having a default, whereas our insured bonds will."

Godfrey said his study, which MBIA plans to publish in book form by the end of the summer, found that about 3% of natural triple-A credits would default under the extreme stress of another Great Depression. But he said the insured portion of the triple-A universe would experience a default rate of zero because insurance companies would be able to survive the depression with adequate reserves to pay claims.

Despite that finding, Godfrey said, the market still penalizes insured bonds for what he called "myths" and "misperceptions." The penalty is reflected in the roughly 15 to 20 basis point spread between insured and natural triple-A bonds. The MBIA executive called the extra yield insured bonds pay a "windfall" for investors.

One factor contributing to the market's misperception about insured bonds is the idea that natural triple-A credits are backed by the unlimited taxing power of an issuer according to Godfrey. He called that perception "nonsense," pointing to several issuers who recently found tax increases politically and economically impossible.

The other problem he noted was skepticism among investors that insurance companies actually have the resources needed to pay claims in the event of a default. He said investor education campaigns the company is planning are designed to eliminate those doubts.

"Issuers don't have unlimited taxing power and bond insurers have the means to meet their promises when the chips are down," Godfrey said.

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