Given the recent flight to quality and continued volatility in the noninvestment-grade markets, the value of guarantors like MBIA Insurance Corp. has certainly moved to the forefront of both issuers' and investors' minds.
And that is especially the case when it comes to emerging-market securitizations, where buyers want assurances that those bonds will perform.
"No market is immune from market forces," said Jeremy Reifsnyder, managing director at MBIA, speaking at Strategic Research Institute's asset-backed conference last week in Puerto Rico.
Indeed, recent emerging-market securitizations have been the hardest hit by overall market turbulence, and without credit enhancement provided by financial guarantors like MBIA, several of these deals would not find their way to investors' desks.
"Credit enhancement can provide a hedge against volatility," says Diana Adams, director at MBIA-Ambac International, a financial guaranty joint venture between MBIA and Ambac Assurance Corp. She additionally notes the ease of execution and the ability to tap a larger investor base with wraps.
Of course, there are also economic issues to consider. For example, if an issuer is facing a spread at an unwrapped trading level of 325 basis points over Treasurys, the wrapped transaction would price at 150 basis points over Treasurys. Roughly 125 basis points of that 175-basis-point difference is paid to a financial guarantor for the wrap, leaving the investor with an overall savings of 50 basis points.
That was demonstrated earlier this year when MBIA provided credit enhancements to Mexican issuer Bancomer's $200 million privately placed seven-year future-flow credit card receivables deal. The offering, on a stand-alone basis, would have garnered a triple-B rating, but the enhancement earned it a triple-A and a spread of Libor plus 65 basis points.
According to Adams, when it comes to credit enhancement, the initial call for a financial guaranty comes from the bankers to either ensure the deal will lure investors or to guarantee peace of mind for everyone involved. As one market observer said, "No investment bank wants to be associated with a deal that goes bad."
MBIA has provided wraps for a number of emerging market issuers including YPF, the Peru-based BCP and China-based COSCO. The latter two transactions were placed privately with the use of a conduit.