The U.K. private finance initiative and European infrastructure projects are no strangers to the benefits a monoline wrap provides. Now it's likely that a greater number of municipal and public sector securitizations throughout Europe will feature bond insurance. The monolines are significant players in the U.S. municipals market.
According to Merrill Lynch, since 1995 European public sector bodies have issued a total of E50 billion of asset-backed securities and structured bonds. Municipalities have issued E1 billlion of that total.
"What we have been doing so far is structured debt PFI and public-private partnerships," said one market source. "This is what's happened in the U.K., but there have been new opportunities arising throughout Europe where a wrap placement might make sense." The majority of new activity has so far resided in Spain, where three of the big monolines operate and where sources said the product is better known. But even then there is room for more active involvement, said sources.
The slow disintegration of state supported guarantees may offer greater incentive for municipalities to find third-party support elsewhere. Monoline insurance not only establishes the triple-A rating of the bonds, but it broadens the distribution and liquidity appeal, Merrill notes.
"These municipals would have to pay the state for a guarantee anyway, so in some cases there are other reasons outside the financial that might be a motivator - like political reasons," explained one source. "The price of debt might be lower if they choose the monoline wrap and because you end up dealing outside of the state, it could open your deal to a new investor base."
It's likely that the incentive to securitize will continue to appeal to municipalities, as the asset-based aspect of financing means money can be raised more easily than through straight debt.
"There has been an increase in opportunity over the last 18 months, which means that these issuers have a need to create a large investor base," said one source. "And while monolines can potentially step in and start filling in these gaps, governments need a wider understanding of what monolines can do."
Until then, sources said that monoline would maintain an active involvement in the European infrastructure market, though sources confirmed that they have received regular inquiries.