Relates to limitations on insurers that may provide certain surety bonds by changing the claims-paying ability rating needed for eligibility

BILL NUMBER:S6483

Title of bill

An act to amend the local finance law, in relation to limitations on insurers that may provide certain surety bonds

Purpose

The purpose of the bill is to amend the local finance law to allow highly rated insurers to provide surety bonds in support of municipal bond underwriting bids.

Summary of provisions

This bill would amend paragraph three of subsection (c) of section 58 of the local finance law to expand the range of ratings of insurers authorized to provide surety bonds to entities bidding to underwrite municipal bonds from those rated triple-A to those with a rating in the single-A category or higher.

Justification

The bill would expand the range of insurers that may provide an "eligible surety bond" in support of underwriter bids on new municipal bond issues.

Currently, Section 58 of the Local Finance Law authorizes an entity bidding to underwrite new municipal bond issues to provide an "eligible surety bond" in lieu of a certified or cashier's check, cash, or letter of credit that would otherwise be required as a "good faith" deposit in connection with its bid.

Such surety bonds save prospective municipal bond underwriters time and money in the bidding process, and can increase the number of bids on any given municipal bond issue - particularly issuances from smaller municipalities that might otherwise be neglected by some underwriters. Increased competition in underwriting bids should generate borrowing cost savings for municipal issuers and local taxpayers and increase their access to the capital markets.

Section 58, in its present form, requires that "eligible surety bonds" be executed by an insurance company licensed to do business in New York with a claims-paying ability "in the highest rating category by at least two nationally recognized statistical rating organizations."

In view of Standard & Poor's downgrade of the United States' long-term sovereign credit rating to AA+ from AAA, Section 58's requirement that a surety bond provider be rated "in the highest rating category" (AAA or triple-A) is overly restrictive. Financial guaranty insurers, which are also authorized to write surety bonds under Article 69 of the Insurance Law, have historically offered this product in New

York, but are presently unable to do so because none are rated triple-A.

This bill would allow for a highly rated insurer with a rating in the single-A category or higher to provide an "eligible surety bond."

An expansion of the ratings range for insurers providing surety bonds in support of municipal bond underwriting bids is appropriate because:

o it would reflect the changed credit ratings landscape in today's financial markets; and

o it would facilitate the return of an important product to municipal bond underwriting - a product that can save New York State's municipal issuers and taxpayers money through increased competition in the bond issuance process.

Legislative history

None.

Fiscal implications

Borrowing cost reduction for issuers of municipal bonds in New York State.

Effective date

This act will take effect immediately.