Municipal Bond Insurance after the Financial Crisis: Can it Help Reduce Borrowing Costs for Local Governments?

24 Pages Posted: 12 Jul 2018

See all articles by Kenneth Kriz

Kenneth Kriz

Wichita State University

Marc D. Joffe

Public Sector Credit Solutions

Date Written: 04/20/2017

Abstract

After achieving peak revenue of $1.5 billion in 2007, the municipal bond insurance business collapsed in the wake of the financial crisis. More recently, the industry has started to recover, with three market participants seeking to write new policies. Our study asks whether municipal bond insurance is a good deal for local government debt issuers. We address this question by analyzing samples of insured and uninsured California municipal bonds with underlying ratings of AA/Aa2 or lower. For these samples, we computed all-in true interest costs and then performed multivariate regressions to determine the extent to which insurance status and other factors were associated with variances in these costs. We found that deal term, issue size, interest rates at time of issuance, and whether the deal included capital appreciation bonds explained changes in all-in true interest costs, but the insurance indicator was insignificant. We conclude that municipal bond insurance does not save issuers money.

Suggested Citation

Kriz, Kenneth and Joffe, Marc D., Municipal Bond Insurance after the Financial Crisis: Can it Help Reduce Borrowing Costs for Local Governments? (04/20/2017). MERCATUS RESEARCH, Available at SSRN: https://ssrn.com/abstract=3211668 or http://dx.doi.org/10.2139/ssrn.3211668

Kenneth Kriz (Contact Author)

Wichita State University ( email )

United States

Marc D. Joffe

Public Sector Credit Solutions ( email )

1655 N. California Blvd.
Suite 223
Walnut Creek, CA 94596
United States
14155780558 (Phone)

HOME PAGE: http://www.publicsectorcredit.org

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