Despite waning demand for U.S. municipal bond insurance, a startup company believes there is value in credit enhancement among the world’s developing markets.
David Stevens, an industry veteran who was the chief executive officer at XL Capital Assurance, plans to launch Affinity MacroFinance, a mutual financial guaranty insurance company, in the second quarter of 2011.
Stevens believes AMF could increase investment in development while securing returns for investors.
The company aims to raise $300 million of capital from socially conscious investors such as government development aid agencies, and believes it could generate up to $12 billion in financings from this capital base in the early years of operation.
AMF has no interest in wrapping U.S. municipal bonds. Instead, it seeks to take an amended version of the monoline business model and apply it to public projects in developing markets where issuer needs are arguably greater — and where premiums could be higher, too.
AMF’s business model won top honors in March for innovative financial solutions at a competition hosted by the World Bank, the Bill and Melinda Gates Foundation, and the Agence Francaise de Developpement. AMF won $100,000 in cash from the sponsors, who said its concept could “help emerging nations become increasingly financially self-sufficient in their development activities.”
Stevens is known for growing XL Capital — since renamed Syncora Guarantee Inc. — into the fourth-largest municipal insurer in the industry from 1999 to 2004. He said AMF has so far received a $100 million funding commitment from a multilateral development agency, which he declined to name, citing legal constraints.
Stevens is no stranger to the developing world — in the late 1990s, he played a role in closing MBIA’s first local-currency infrastructure deal in Latin America.
It was there that he learned how credit enhancement could unlock a virtually untapped source of capital in emerging markets. He believes Affinity MacroFinance could do the same in 77 developing countries.
Targeting Homegrown Funds
For this to work, local pension funds have to be on board.
AMF has calculated that 45 of its 77 target countries have accumulated pension savings of $1.1 trillion in local currency.
Rwanda holds the equivalent of $250 million in pension fund cash, and Ghana has $8 billion, according to AMF. More developed nations have greater savings: Chile reported $74.3 billion of pension savings at the end of 2008, while Mexico reported $67.7 billion.
Going for Single-A
In Steven’s view, the problem with the surety product is supply — start-ups have not been able to attract enough capital to attain high ratings, and existing insurers remain troubled by mortgage-related debt.
AMF intends to avoid steep capital requirements by seeking a single-A, global-scale rating, as opposed to the triple-A ratings traditionally sought by the monolines.
The lower rating shouldn’t stop AMF from bestowing a triple-A-rated credit enhancement on its insured bonds. That’s because none of the targeted countries’ sovereign credits are rated higher than single-A on a global scale. A single-A surety, therefore, would translate to triple-A on the respective national scales. As a result, pension funds restricted to investing in only the highest quality instruments would be able to buy into AMF-wrapped bonds.
