Fitch Ratings has different take on the return of bond insurance.
Insurance wrappers,’ popular before the credit crisis, are being used once again, primarily in the municipal bond market and to a lesser extent in some emerging market securitizations. This is despite the fact that the insurance companies offering it have yet to restore their triple-A ratings. In a report published last week, Fitch said that this can be explained by the fact that insurance has value beyond a ratings uplift. It also provides credit enhancement.
What’s more, Fitch believes that a broader recognitionof this value will ultimately prove to be a healthy outcome for the market.
Prior to 2008, the monoline insurers had to maintain triple-A ratings to secure business. When they were downgraded, there insurance became worthless.
Today two of the three major rating agencies — Moody's Investors Service and Fitch — cap their ratings of the financial strength of U.S. bond insurers at single-A. Other rating agencies, including Standard & Poor's and Kroll Bond Rating Agency, still rate bond insurers as high as double-A.
Even at the single-A level, bond insurance can have significant value, according to Fitch. “The more important rating relationship is the relative difference between the bond insurer's rating and the underlying bond rating at the time the wrapped bond comes under stress,” the report states.
“As long as the bond insurer remains financially viable, which would be expected for those with financial strength ratings in the 'A' category, the insurer will enhance the credit quality of the wrapped bond. Importantly, at such a point of stress, it would be expected that the underlying bond rating would be downgraded to a level lower than that of the financial guarantor.”
This extra credit enhancement provided by the monoline wrap has made some difference in Puerto Rico and Detroit, according to Fitch.
“Investors who purchased these issuers' bonds with insurance from a solvent monoline enjoy much stronger valuations today versus equivalent unwrapped bonds," the report states. “Insurance can also provide increased market liquidity for issuers and assist smaller or less frequent bond issuers in accessing the market.”
In the asset-backed market, Assured Guaranty Corp. has returned to one of the corners of the securitization market where it was once most active: diversified payment rights in emerging markets. This is despite the fact that the monoline’s guaranty is now rated AA’ by S&P and one notch lower, at A3,’ by Moody’s.