BAM is a true monoline municipal bond insurer that only guarantees transactions from issuers that finance essential public purposes.
The U.S. municipal market is one of the most diverse, heterogeneous markets in the world with many different types of issuers, distinct sectors and a wide variety of security types. BAM’s focus means that its insured portfolio is backed by reliable revenue streams, with low volatility and minimal political risk.
Specifically, BAM only insures long-term, fixed rate securities issued by municipalities or municipal entities that are an integral part thereof or entities qualifying under Section 115 of the Internal Revenue Code. And within that segment, BAM only insures bonds issued to support essential public purposes such as schools, utilities, core governmental functions, existing transportation facilities and bonds that are secured by unencumbered property taxes or other pledged taxes or fees.
BAM does not insure bonds in the so-called “private” segment of the municipal market. This riskier segment of the market includes bonds secured by revenues from a new or unproven project; bonds backed by real estate; bonds secured by private entities, including not-for-profit 501(c)(3) entities such as private universities or hospitals; bonds structured with swaps or other derivatives; and bonds secured mostly by payments made by private, third parties.
BAM’s Insurable Sectors Have Historically Performed Well
The segment of the municipal market in which BAM operates represents more than 80% of the outstanding municipal debt, yet has been the source of only 20% of the monetary defaults in the outstanding market. Additionally, the default rate for municipal bonds issued for essential governmental purposes is estimated to be between .03% and .06%, including the recent stressful economic period. Further, virtually all defaults in the essential purpose sectors are not terminal defaults but are interruptions in bond payments that typically last only a few years. In other words, loss severity is low as a percentage of the par amount insured. BAM’s insurance policies cover principal and interest, as scheduled, and no payments on insured bonds are subject to acceleration or early call.