The American International Group downgrade, coupled with the recent troubles at MBIA, has raised concerns over the possible ramifications for the European markets if a monoline insurer were to take a ratings hit.
"On our count, monolines have guaranteed just over 5% of triple-A public issuance in the European securitization market since the mid-1990's," said researchers at Deutsche Bank Securities. "Ambac and MBIA dominate. We note that many of the wrapped deals barely fit the textbook definition of a securitization - think project finance and U.S.-style revenue bonds instead."
Initially, market analysts expected the AIG downgrade to double-A plus from triple-A to have a more immediate affect on the Canary Wharf Finance II deal, which was placed on negative watch by Standard & Poor's on March 31. The deal has since been taken off negative watch as the agency found sufficient separation of credit risk from AIG as a credit facility provider on the deal.
The latest deals to feel the backlash of recent events are three synthetic CDOs. S&P last week lowered the ratings on Eirles Two Ltd. Series 164 and Heather Finance ltd. Series 2002-6 to AA+' from AAA' where they remain on negative watch. The agency also placed the ratings on Corsair Jersey No.2 Ltd series 1, 2, 3 and 4 on negative watch.
"Banque AIG, the wholly owned subsidiary of AIG, acts as an interest-rate and currency swap provider in a number of prominent European ABS/RMBS [that] include the U.K. mortgage master trusts Granite, Holmes, Permanent as well as selected Fiat's auto ABS," said analysts at Deutsche Bank. "AIG's one notch long-term rating downgrade has, for now at least, had no impact on its obligations as interest rate and currency swap counterparty in these European securitizations."
Investors can be further reassured by the downgrade language in these deals, which requires for cash collateralization or replacement counterparty or equivalent upon any downgrade of AIG's long-term and short-term credit ratings to below Aa3'/'P1' and'AA-'/'A1+' and by Moody's Investors Service and S&P, respectively.
At the moment, the rating agencies hold steadfast in their views that there is no threat to any monoline credit ratings. S&P earlier this month published a report on MBIA and reaffirmed that they had yet to receive any information that would cause them to change the rating or outlook on MBIA.
Analysts at Deutsche Bank noted that in recent years, the use of monoline wraps in the European term securitization market has declined. As investors have become more aware of the market's functioning, appetite for asset-backed credit and secondary liquidity of senior-subordinated capital structures has increased. Consequently, an increasing number of issuers - notably in the U.K. subprime universe - have stopped including wraps on deals. Moreover, much of the senior/subordinated paper has priced in line with that which carries a guaranty. "GMAC-RFC, as a case in point, ceased employing monoline guarantees for its U.K. RMAC program in late 2004," reported Deutsche Bank analysts. "What we cannot see, however, is the extent of monoline activity in the private markets, which we understand has picked up considerably over the past two years or so."
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