N.Y. Bond Insurer Rescue Plan Seen as a Tough Sell but Important

By Leslie Wines | February 1, 2008

Advisory firm Perella Weinberg Partners, hired by New York state to help find investment capital for cash-strapped bond insurers, is facing both skeptical lenders and time constraints.

The situation is so dire, however, their strongest leverage may be the size of a potential fallout for the big investors from whom they are seeking investments, according to analysts.

A spokesman for state insurance superintendent Eric Dinallo confirmed the hiring, but declined to say who is likely to be approached by Perella Weinberg. Commercial banks will be asked to back up credit lines for troubled insurers and private equity firms and billionaire investors like Wilbur Ross will be asked to take investment stakes, according to media reports.

New York and other states have much at stake. They and local governments buy bond insurance to make investments in infrastructure and other projects more appealing to investors. Insurers guarantee at least the principal investment, plus interest, in the case of defaults.

The trouble is that bond insurers have found their capital reserves in jeopardy because of huge investments in the same subprime mortgage sector that has left banks reeling. Some insurers have been downgraded, meaning they cannot back new municipal bonds. Bond insurers are not an attractive investment at the moment, meaning a tough sell for Dinallo, according to Mirko Mikelic, a senior fixed-income portfolio manager at Fifth Third Asset Management.

Investors “may not want this level of risk, without a very big return that the insurers can’t give,” he said.

And if bond insurance becomes unavailable, cities and states may not be able to borrow money, a scenario that could wreak havoc on everything from road projects to sewers, and could seep across the entire economy.

A series of recent blows for the insurers further diminished their attractiveness as investments. Fitch Ratings yanking the stellar “AAA” ratings away from Ambac Financial Group Inc. and Security Capital Assurance Ltd, making it impossible for those institutions to insure future deals.

Perella Weinberg Partners does carry a potentially big stick, however.

Large investors that could help bond insurers know that if bond insurers can’t operate, the potential damage could spread from Main Street USA. to Wall Street.

“I think there is a very large incentive to work out some form of support for the insurers,” said John Flahive, director of fixed-income at BNY Mellon Wealth Management. “I talked to a lot of people in the market and everyone is all for this. We’re just somewhat confused because of the complexities of it.”

T.J. Marta, a fixed-income analyst at RBC Capital Markets, said the urgency behind the rescue plan makes it likely to succeed in some form.

“This really can’t afford to fail,” he said. “It is too important to fail.”

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