Even though bond insurer MBIA has its hands full these days, the recently announced interim - but still pending - resolution with bankrupt auto lender Union Acceptance Corp. is one less worry. But how MBIA handles adversity goes a long way in creating asset-backed investors' perception of a surety provider and how it protects its interest and the interests of its shareholders.
"The triple-A ratings are integral to the financial guarantors' ongoing business, as they cannot afford to jeopardize their ratings. The no-loss underwriting standard is an important consideration for the rating agencies," penned former Banc of America ABS researcher Meredith Hill in a 1999 report entitled: Financial Guaranty Insurance,' which was reprinted in this publication.
For example, MBIA, in its dealings with Union Acceptance, saw trouble on the horizon as far back as June 2002, when it requested UAC raise at least $35 million in a secondary equity offering. MBIA also requested that a "tangible net worth" covenant be added to the insurance documentation, setting a trigger level, which if breached, would allow for a servicing transfer.
Had it not complied, MBIA indicated that it would not renew its guarantee for a $200 million revolving credit facility it had with Bank of America N.A. BofA meanwhile had already indicated a willingness to renew - without the two caveats. MBIA also said that pending continual servicing evaluations, "UAC be reappointed to act as servicer for successive periods of only 60 days, subject to renewal by MBIA," according to court documents.
Eventually Union Acceptance obliged and signed three servicing term agreements and added Amendment No. Eight to the facility agreement with MBIA. Union Acceptance did raise an additional $35 million in a privately placed equity offering, stock which eventually became almost worthless.
However controversial, it could be argued that this is the moment when MBIA is earning its fees flexing its risk management muscles, preserving its triple-A insurance rating (an unarguable positive beyond the scope of UAC), adding confidence to investors holding MBIA-wrapped paper, and protecting its own equity holders.
In fact, a monoline insurance policy on a credit card deal automatically gives it a vested interest in more than just the series it guarantees. The revolving nature of credit card trusts makes it impossible to transfer servicing rights on just one series. With investor preference having shifted to wrapped transactions for some issuers over the past six months, some feel that the presence of a monoline insurance policy protects some senior-subordinated deals as well.
"Since an issuer can't transfer servicing on only its wrapped deals, there would need for a trust-wide servicing transfer," said one credit card banker. "So I would agree that MBIA's involvement could help all series in a trust."
"A credit card trust has a pro-rata sharing of accounts throughout the trust," noted Barclays Capital researcher Jeff Salmon. "If ever it comes that an issuer couldn't service the portfolio, you can bet they will find someone who can."
