Information & Resources

Bond Insurance Option

Speer Financial, Inc. analyzes the cost benefit of municipal bond insurance. Securities that are insured may receive a Moody's Aaa; or a Standard & Poor's AAA; or a Fitch AAA rating and typically sell with interest rates similar to uninsured A1 rated bonds. Thus, a "Aaa/AAA" underlying credit would sell better than a "Aaa/AAA" insured credit.

The added cost of insurance must be offset by a lower interest rate for the one time insurance premium to be cost effective. Over 50% of the municipal market is now insured, due to aggressive pricing and broader acceptance of securities beyond general obligation bonds by insurers. Should insurance or other credit enhancement be advantageous, Speer Financial, Inc. would recommend one of several actions:

to obtain a commitment from one or more companies for insurance and design the sale for insurance purchase at the option (and cost) of the potential bidders; or
to obtain the insurance at the cost of the issuer; or
to require the security purchaser to pay for the insurance, in which case the cost will be reflected in the price paid for the securities.

Insurance may not be cost effective for issuers with stable credit ratings greater than "A1," or for very small or short term debt issues. The break-point at which bond insurance makes sense changes daily with the municipal market, and is best determined close to the sale date.