Roughly 10% of funded European ABS issuance for 2003 carried a wrap by one of the three major monolines - Ambac, FSA and MBIA, according to a report on European monocline activity by Merrill Lynch. The Association of Financial Guaranty Insurers (AFGI) said it expected these numbers to increase by about 4% for year-end totals in 2004 with significant growth opportunities in 2005.
Members of the AFGI said that the modest gain in 2004 was concentrated in the asset-backed sector - accounting for over $48 billion in insured par value. In 2005, AGFI members are predicting a significant growth in international par insured ABS.
On the buyside, this optimistic tune runs high as well. The AGFI conducted its first-ever institutional investor survey at the end of last year. Of the 74 institutional investors surveyed by the AFGI, 83% said that the major growth sector for monolines was expected to be concentrated in the project finance initiative and public partnership project arenas. During that same period, 84% of investors surveyed said that an increase in securitizations would follow over a five-year period.
"In terms of where the funding will come from, our survey results indicate that there are differing views about how European infrastructure projects will be funded," said Neil Budnick, AFGI chairman and president of MBIA insurance. "Bank funding will remain important but 25% of the respondents see a decrease in bank participation and 40% see a flat to declining number. Of course, the increased use of the capital markets bodes well for the use of monoline insurance."
"Monoline insurance simplifies the story for the investor and parallels how this insurance grew in the domestic U.S.," said Budnick, adding that it remains to be seen whether the use of monoline insurance will penetrate all of Europe, as it had in the States. Among the investors surveyed, 60% report that the major growth area in Europe would be Spain, with an increase in public infrastructure or securitizations. Germany and the U.K. were expected to occupy the second and third places respectively of largest growth areas in Europe.
Concerns of over exposure to any single monoline concentration were also addressed in the survey. The majority of investors said exposure limits are set by using a percentage of total assets under management, as well as employing a dual default probability, which allows investors to factor both the probability of default and loss, given default, of the underlying security and the guarantor. The investors consider both the strength of the monoline and the strength of the underlying credit and determine its credit exposure limit to reflect the dual exposure.
Budnick noted that U.S. investors used similar measuring techniques but said that these limits rarely prevented investors from buying insured securities. "It suggests that the dual default scenario is becoming more widely accepted," he said. "That's because a powerful attribute of monoline-insured paper is the benefit of two-name' paper, which takes into account the investment grade rating of the underlying credits."
Other growth opportunity areas projected in Europe were CDOs, with 46% of investors expecting increased monocline activity, 34% expected a rise in commercial receivables guarantys, 19% expected increased activity in construction receivables and 12% anticipate growth in RMBS.
Monoline insurers are also involved in writing large notional ABS default swap positions on super senior tranches of synthetically executed public and private transactions, noted Merrill researchers. Tracking the monolines' involvement on this front is difficult, but overall figures indicate this remains an area of potential growth. In the December issuance of a GBP392 million ($737.8 million) partially funded synthetic project finance loan securitization for DEPFA Bank dubbed EPIC, Ambac took a position on the super senior swap as opposed to wrapping the deal.
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