Six years after losing its triple-A ratings during the financial crisis, rendering its bond insurance worthless, Assured Guaranty Corp. has returned to one of the corners of the securitization market where it was once most active: diversified payment rights (DPR) in emerging markets.
The monoline’s guaranty still does not carry a triple-A rating; its wrap is now rated AA’ by Standard & Poor’s and one notch lower, at A3,’ by Moody’s Investors Service.
And a lack of insurance has not kept banks from securitizing DPRs, which are a future-flows asset class linked to all the electronic money that flows through a bank, including payments for exports, remittances from nationals working abroad, and foreign direct investment.
In fact DPRs have a sterling performance record, with not a single loss incurred by investors. Even Kazakh bank-issued DPR deals that breached covenants during the crisis ultimately repaid investors at par.
This raises the question as to what kind of value Assured’s wrap hase for an asset class that is not many notches away, ranging between triple-B and single-A, depending on the rating agency and originator (see table). Garanti Bank, clearly is value, as the Turkish bank went with an Assured wrap on the $200-million C tranche of a five-year deal backed by DRPs issued in mid-May.
Reflecting the wrap, S&P rated the C piece AA.’ The deal also came with a $300 million unwrapped B tranche, rated A’ by Fitch Ratings.
S&P’s ratings on Garanti’s unwrapped DPR bonds is BBB+,’ indicated where its rating would have been on the unwrapped B tranche. The deal was arranged privately.
“For us the main motive for having the Assured wrap in the structure was to demonstrate that there’s still interest in the product from the perspective of [private institutional investors],” said Batuhan Tufan, senior vice president of structured finance at Garanti. Post-crisis, the DPR deals issued by Garanti have been either purchased by banks as club transactions or purchased by multilaterals.
Tufan said that meeting eye-to-eye with institutional investors on pricing has been difficult in past several years. “There has been interest in the product but not at levels that are economical for us,” he said.
This is not, however, the first time post crisis that a Garanti transaction has been wrapped. A DPR transaction issued in 2012 for $400 million with a tenor of 14 years was purchased by U.S. government agency the Overseas Private Investment Corporation (OPIC) and wrapped in the secondary market by MBIA. The MBIA wrap was, at that time, rated well below investment grade and a far cry from Garanti’s ratings.
Apart from the ratings uplift, a wrap can add value by giving investors additional comfort due to the due diligence, and the ongoing oversight and surveillance provided by a monoline insurer, said Jeff Farron, a director in the structured finance group at Assured. He said a wrap can also provide relief of capacity limitations to a given bank or sovereign.
OPIC and MBIA declined to comment for this article.
In the case of Assured, the double-A wrap has the added value that it could attract the sort of investor that in the past would have gone for a triple-A, said participants in the Garanti transaction.
Particularly in Europe there is a dearth of triple-A paper, as a large number of sovereigns and banks have been hit with downgrades. “The market has come to accept double-A paper much more than before,” said Juan de Mollein, managing director at S&P. “In Europe we’ve seen a lot of double-A paper get placed over the last 18-24 months.”
“The whole ratings scale has shifted a bit,” said Farron. “There’s significantly fewer triple-A rated issues, which increases the value of the double-A [paper].”
In the case of the Garanti deal, there was apparently only one investor. Neither Garanti nor Assured would name the buyer, however.
Robert Tucker, managing director at Assured, said that the insurer continues to pursue the highest possible ratings for itself, in order to be able to offer more highly rated wraps. But he said this has become more difficult as the rating agencies have tightened their criteria for monolines, just as they have with other entities.
In the case of S&P, this rating is limited by factors outside Assured’s own financial condition: the rating agency, which recently upgraded Assured to AA’ with a stable outlook, will not rate an insurance company domiciled in the U.S. above its soverign rating on the government, which is currently at AA+’.
Right now, Assured is the only monoline insurer that is active in the space. “There’s been an uptick in our international activity in both infrastructure and structured finance,” Tucker said. He added that the insurer already has another DPR bond mandate and is looking for more business in the asset class.
Along with the other monolines, Assured used to have a much larger book in future flows in general and Turkish DPR bonds in particular. “It’s substantially run off at this point,” said Farron.
The last future flow deal that the monoline wrapped prior to Garanti was originated by Banco do Brasil in 2008. The last one in Turkey was a deal by Yapi Kredi in 2006. As the tenor of these transactions is between five and 10 years, it is easy to see why Assured’s future flow portfolio is quickly shrinking.
Unlike some of the other monolines that had Turkish DPR exposure, Assured was never taken off any of the deals it wrapped after the insurers were downgraded over the course of the crisis. “We’ve maintained dialogue with many of the originators in the DPR space because of our existing exposure and the fact that we maintained strong ratings,” said Farron.
Turkish originators issued several billions of dollars worth of wrapped DPRs beween 2004 and 2007 with the involvement of all the main monoline insurers. ,l below that the deals themselves. Over that period, banks issued several billion
By late 2010, at least three Turkish originators had exchanged unwrapped tranches for outstanding ones with now-worthless insurance. Investors were willing to do this because they were offered an additional spread on an investment that was no longer triple-A.
One banker familiar with the asset class said that, despite the unbeatable performance of DPRs, there will always be investors who will be wary of the banks’ location in emerging markets and will prefer to have some kind of wrap, even if it is not rated triple-A.
