|
A company who provides financial guarantee insurance is often called as financial guarantee insurer or bond insurer.
The bond issuer usually uses a financial guarantee insurance to raise the credit rating of the bond by wrapping the credit rating of the insurer around the debt obligation (the bond). This allows the bond to qualify for lower interest rates. For instance, many municipalities using muni bonds in the US use bond insurance to get AAA rating. This lowers their borrowing costs and helps the municipalities save money on the on the whole business deal. In order for this to happen, it is of utmost importance that the financial guarantee insurer has a very high credit rating so that it can wrap the debt obligation that is being insured.
If you take into account cost and accessibility, financial guarantee insurance actually goes a long way in improving the efficiency of the capital markets.
If a bond insurer is downgraded (in credit rating) for any reason, each bond that the insurer insures is also downgraded to the same level. Sometimes, the bond is downgraded to the level it would have had if the bond had no insurance. The downgrading does not necessarily make the bond a riskier prospect as the bond is still the same product but the holder of the bond is unlikely to gain as much money on the sale of the bond prior to maturity. The purchaser will not longer value it the same way as the bond does not have the backing that originally aided in increasing the value of the bond.
Different insurer charge different financial guarantee insurance bond rates depending on the type of bond and the risk factor. The bond issuer usually will try and negotiate the best rate so that he does not have to pay high premiums on the financial guarantee insurance.
More Articles :
|
|