The Build America Bonds ("BAB") program, implemented as part of the American Recovery and Reinvestment Act of 2009 ("ARRA"), has been wellreceived by both investors and issuers. With a 35% rebate on interest payments from the federal government, issuers of BABs have been able to realize significant savings than they would have otherwise.
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Many commentators and analysts are talking about the "muni-bubble," the coming crisis in municipal bonds which will rival the technology and housing bubbles of recent years. While investors should be concerned about municipal credit generally, given the stress of the current recession, market fundamentals do not suggest an imminent collapse of the entire municipal bond market.
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Municipal bonds are relatively safe investments, as evidenced by the modest default rates experienced historically. Those bonds that do default are usually project-type financings where for any number of reasons - including construction problems, operational issues, and overoptimistic demand projections - the projects failed to perform as expected. Recent defaults of this nature include the Las Vegas Monorail deal; Jefferson County, Alabama Sewer bonds; and hundreds of land-secured bonds in Florida.
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Last week, our review of bond insurance looked at the history of this industry. This week, we look at the current state and likely future of bond insurance.
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In late 2007 and 2008, the municipal bond insurance industry imploded as a result of its substantial exposure to the collapsing hous-ing market. The industry had guaranteed billions of dollars of mortgage-backed securities over the previous five years, leaving itself vulnerable to the unprecedented financial meltdown. During 2008, all but one of the top-rated legacy insurers lost their coveted triple A ratings.
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