Over the past few months, there has been a slight uptick in deals that are simultaneously structured and wrapped to the triple-A level, according to market sources.
Most recently, Textron Financial's pooled aircraft lease deal that priced in late November via Deutsche Banc featured doubled credit enhancement, the wrap provided by MBIA. Earlier in the quarter, Delta Financial brought a transaction with a similar double triple-A.
Still, some are hesitant to call it a trend. "You may see it from now and then, but I haven't seen what I would call a pattern," said a senior at Standard & Poor's.
"I'd say you're seeing it periodically now, and you were only seeing it very rarely a year ago," commented Dan Castro, head of ABS research at Merrill Lynch. "It's usually something that happens in times of economic stress, when people are worried about performance of the underlying collateral, or economic weakness."
Beyond credit, the sureties add liquidity to a deal, which can go a long way in these shaky times.
"You may have a situation when you have a specific investor who wants a wrap even if it's already triple-A," Castro added. "If they're going to buy enough of the deal, the issuer may do it. It's a trade off between the incremental cost of getting a wrap, and the improved execution."
Interestingly, while maybe not a post-Sept. 11 phenomena, some issuers have found a larger market for the higher yielding sub bonds than for their triple-As, a source noted. This is partly because ABS new-deal supply at the triple-A level is so much more robust. In these instances, issuers who have been able to sell the subordinate classes might have purchased a wrap on the top piece to broaden their investor base.
For example, over the past year, sources have told ASR that there is a contingent of European investors who will only buy wrapped paper.
Of course, a double triple-A does add protection, noted said Tom Zimmerman, researcher at UBS Warburg, as it essentially mitigates monoline downgrade risk. If the insurance company was downgraded, the deal would still be rated triple-A. According to Zimmerman, the use of the structure was sometimes seen in the mid-1990s for this reason.
Meanwhile, the overall increase expected in demand for wraps, especially from non-prime issuers, has reportedly pushed up prices, and will likely push more business to the new entrants, such as XL Capital Assurance, speculated Jeff Salmon, of Barclays Capital.
