In light of the rapid evolution of the European investment community over the last two years, overseas investors - especially new entrants into the ABS market - have faced the formidable challenge of needing to self-educate and bring themselves up to speed regarding the nuances of the often-confusing securitization markets.
As the ABS market continues to grow so strongly outside of the U.S., nowhere is that learning curve required to be steeper than for the lesson that needs to be learned regarding the role of monoline credit enhancement. With more and more European money coming out of the woodwork, as well as factors including the introduction of the Euro and investors' willingness to put money towards instruments other than plain-vanilla government bonds, a familiarity with the benefits of owning monoline-wrapped paper has recently become priority No. 1 for both investors and the monoline insurers themselves.
And as a result of the Hollywood Funding situation, in particular, European investors have been even more vigilant and hungry for information as they learn the advantages of surety-wrapped securities.
"A few years ago, maybe 30 major institutions were buying 80% of public ABS deals in Europe," said Charlie Williams, a managing director of investor relations at MBIA. "That has grown to between 70 and 80 institutions...buying 80% of each deal placed. That is huge growth for that sort of time frame. "
Indeed, MBIA's international net par outstanding has grown rapidly in the last few years, from $6.5 billion in 1997 to $24.6 billion in 1999 and $38.1 billion as of March 2001. The other sureties have followed suit, with MBIA, Ambac, FGIC and FSA guaranteeing more than $161 billion in asset-backed securities, according to Barclays Capital.
Monoline activity in Europe is expected to continue to grow as the ABS market evolves, Barclays says. But as investors learn how to evaluate their exposure to monoline insurers - default risk and spread risk are the two main factors considered - they are often reliant upon the sureties to help them with the education process.
"As different institutions come up the learning curve, there is a wide disparity in the spectrum of knowledge as far as how institutional investors estimate limits for exposure to monolines," Williams said. "As an investor, in order to risk a downgrade, the underlying pool has to fail, and the monoline has to fail. The probability of that is 100 times less likely than a triple-A corporate.
"If you multiply that by the probability of an ABS deal failing, for a $100 million exposure to a triple-A corporate, for instance, you'd have to own $4 billion to $5 billion monoline-wrapped ABS for the same risk. Strengthening the triple-A is our franchise."
But for European investors who are early on in the learning curve, that may not mean much. Many new investors do not have the expertise to analyze the different structures, and many have just recently started to build their ABS teams.
That is why the sureties have been stepping up their efforts to communicate with fixed-income investors overseas. In addition to the surveillance function they perform - investors generally cannot undertake to properly surveil all transactions - the monolines have beefed up their investor-relations teams and have put resources towards educating investors.
MBIA, for instance, has had well over 100 separate meetings recently with investors in Europe, giving them a chance to explain how monolines reduce or eliminate headline risk, and describing the risks, processes, problems, issues and benefits associated with monoline credit enhancement. The company also has a team of four in the U.S. alone dedicated to providing investors with information.
Further, some of the largest investors in Europe have portfolios of over $2 billion or $3 billion, and the trend towards larger coffers is only going to continue.
Part of the reason for this is that European investors do not face some of the credit constraints that U.S. investors do. Therefore, buysiders are more willing to throw money towards securities other than the German Bund or other Treasury equivalents. Additionally, there is no real tax-exempt laws in Europe, so the distinction between munis and ABS is not as clear. Therefore, structured finance techniques have been applied to the muni market overseas, and the use of the monolines for such deals is very attractive to issuers and investors.
For instance, the recent Eurotunnel refinancing and Welsh Water deal have benefitted from the financial muscle of MBIA's wrap, as well as the surety's ability to evaluate the risk factors for the parties involved. The Welsh Water deal took 10 months to prepare, but was sold over only a couple of weeks time.
Last week, MBIA wrapped a similar dual-currency $1.2 billion transaction sold in both New York and London, but company sources would not reveal the issuer at press time.
Lastly, the Hollywood Funding saga brought to the fore the fact that while multiline insurers may take more risks than monolines, the property and casualty-style insurance policies which they employ may not be a good match to capital-markets ideology.
"We were very concerned that [Hollywood Funding] might cause confusion among investors who got multiline confused with monoline, but we were heartened to see that within a very short time, they drew a clear distinction," Williams said. "It is clear that the standards of the monlines were the capital markets."