Debt management.

• Position: From the Library - Brief Article

Bond Insurance as a Form of Credit Enhancement in California's Municipal Debt Market

Frank Moore

California Debt and Investment Advisory Commission, January 2002.

Credit enhancement is becoming increasingly common in the municipal market. In California, this is evidenced by the fact that more than half of all municipal debt issued in 2000 was credit-enhanced. The most common type of credit enhancement in California and elsewhere is bond insurance, which guarantees principal and interest payments in the event of a default. In deciding whether or not to insure or otherwise enhance the creditworthiness of a financing, governments need to take into consideration a number of factors. Issuers should have an understanding of the criteria insurers use to evaluate the viability of a transaction and should compare the characteristics of their particular transaction with the specialties of potential providers. Issuers should take into consideration the credit worthiness of potential bond insurance companies themselves. The ability of these companies to pay claims is evaluated by the same agencies that rate credit of municipal bonds. Ratings of bond...