Moody’s Investors Service upgraded its rating of the largest U.S. municipal bond insurer, Assured Guaranty.

Moody’s attributed the upgrade, from A2 to A1, to AGM resolving its exposure to Puerto Rico’s general obligation bonds and limited volatility expected among its remaining Commonwealth bonds.

The rating agency also noted AGM’s “strong capital profile, conservative underwriting of U.S. municipal and international infrastructure finance risks and leading position in the financial guaranty sector.”

Largest municipal bond insurer upgraded

Municipal bond insurer upgrade, brighter outlook for issuers

As buyers and sellers of AGM-insured issues, and with many clients who favor insured bonds, we welcome the news but aren’t surprised. The finances of numerous issuers are also looking up.

States facing challenges at the onset of the pandemic have seen their revenues bounce back and are fiscally strong, according to the results of a survey by the National Conference of State Legislatures (see our article, “States’ Revenues on Upswing”).

A bevy of recent reports support the survey’s conclusions.

California, for example, reported a $45.7 billion budget surplus. The state’s ability to generate so much revenue may even trigger a constitutional limit on spending. Underwriters want California to pay off some if its debt early.

The governor of Kansas has called for her state to eliminate its tax on groceries amid growing collections. The state collected $502.5 million in tax revenue in February, almost 4% above estimates and more than 10% above collections in February 2021.

For the 2021 fiscal year, tax revenue was up 4% over estimates and 5.6% more than the same period the previous year. Sales and use taxes were up almost 15% vs. the last fiscal year, The Bond Buyer reported.

Oklahoma’s governor also sought to end his state’s tax on groceries. As of February, the state’s oil and gas gross production tax collections more than doubled, on a 12-month basis.

In Minnesota, officials anticipated a $7.7 billion surplus for the biennium – a record – and revised it upward by an additional $1.5 billion. The governor has said he wants to devote $2.7 billion to replenish the state’s unemployment insurance trust fund and for payouts to frontline workers.

Further, Michigan’s governor has sought to shore up the state’s reserves by $51.8 million, drawing from a $7 billion surplus resulting from tax collections that were higher than forecasted as well as federal aid. New Jersey is chipping away at its long-term debt obligations, clearing about $2.2 billion in bonded debt from the state’s balance sheet.

Healthy market and a good night’s sleep

Officials attribute the escalating revenue projections to several factors. In addition to softer fiscal fallout from initial pandemic predictions and significant federal aid, inflation and swelling oil and gas prices are playing important roles, too.

Overall, we are heartened by healthy bond insurers and issuers, but again, not surprised.

From our decades of experience, we understand why the unique nature of the municipal bond market enables investors to get a good night’s sleep while their interest clock continues to tick.

James A. Klotz is the President of FMSbonds, Inc. Email the Author03/23/2022