After falling out with more than a few buyside circles, political risk insurance (PRI) is back. Five bond deals since mid 2003 come with the policy and more are in the works, according to sources. While all of these are more corporate than ABS in substance, the cast of players - in terms of investors, analysts, and bankers - often overlaps with structured finance.
In early 2003, the prognosis for PRI looked grim. Argentine deals that had the policy attached defaulted anyway, leaving some investors wondering what exactly it was supposed to cover if not a sweeping pesification of the economy. "It's purely a liquidity product," said Brigitte Posch, vice president at Moody's Investors Service. "It basically tells investors that as long as the issuer is able to provide the equivalent debt service in local currency, then the provider will make the debt service payments in dollars."
Sources said that at least some of the hapless investors appeared to have conflated PRI with sureties that cover credit risk. Bondholders that filed claims on defaulted PRI deals in the MBS and utility sectors in Argentina came away with nothing.
"It's just one risk in a chain and it's not necessarily the weakest link," said Sam Fox, head of Latin America structured finance at Fitch Ratings.
In hindsight, investors in crumbling PRI paper misidentified the Achilles' heel of what they were buying into. When the Argentine government imposed a comprehensive pesification of the economy and the peso plummeted against the dollar, greenback-denominated paper of every stripe tumbled like dominoes, regardless of what sovereign interference there might have been in the actual payment. While the desperate government did half-heartedly tamper with capital flows in the post-devaluation climate, that intervention was beside the point for the PRI deals. "These issuers couldn't get the corresponding amount of money to the local bank and that's key to triggering the policy," a banker said.
In a typical PRI policy, the insurer will only pay a coupon if a sufficient sum of local currency is deposited in a designated bank. What's more, the provider "is not required to top it off either," said Fox.
Providers include the Overseas Private Investment Corporation (OPIC), Steadfast Insurance Company (a unit of Zurich American Insurance Company), and Sovereign Risk Insurance.
In terms of creditworthiness, what PRI does is bump up a deal's foreign currency rating to its local currency rating, both on the global scale. Recent transactions have included subordinated notes from banks such as Banco Bradesco and Unibanco and paper from Tele Norte Leste Participacoes, Companhia Brasileira de Bebidas, and Brazil Telecom. None of these transactions featured an ABS component.
Now that investors have wised up to the true scope of PRI, the deals are pricing wide to their predecessors, sources said. "People don't value it like they used to," said one New York-based trader. "But there are still high grade guys who'll go in."