While penetration of monoline insurance companies into the traditional U.S. asset-backed market slipped considerably last quarter1, the same sureties are doing a killing in the booming European synthetic collateralized loan obligation market, industry sources said.
"It really has been a good business for the monolines, and we've all played an active role there," said Philip Sullivan, a managing director in MBIA's London office.
In addition to an increased number of CLOs, the average transaction size has increased.
According to Ambac Assurance Corp., the majority of the deals this year were $4 billion-plus, compared to the $2 billion to $2.5 billion deal size commonly seen in 1999.
Also according to Ambac, in June of this year there were 17 synthetic deals being structured. For the entire quarter, volume exceeded $25 billion, and Ambac anticpates there could as much as $50 billion in synthetic CLO issuance for the fourth quarter, and $100 billion for the year, granted the deals get done before year-end.
In a synthetic CLO, the issuer keeps its assets on its balance sheet while transferring the risk into capital markets. Typically the bank that originates the risk enters into a swap agreement with a counterparty, which then enters into a mirror agreement with the monoline as a way of distributing risk.
Although the use of synthetic CLOs has blossomed in the states, it hasn't matched the growth abroad.
Europeans use the structure for regulatory capital relief. Additionally, in some European districts, it's more difficult to transfer assets off balance sheet than it is in the U.S., MBIA's Sullivan said.
The monolines, including Financial Security Assurance, have had a presence in Europe for the past 10 or so years, though the securitization market had been slow to grow for the better part of the 1990s, limiting business opportunities to commercial paper and the occasional public finance deal.
In 1995, the monolines increased activity with the advent of the private finance initiative, where the U.K. government was transferring the operating risks (in addition to the financing risk) associated with a number projects, such as hospitals and toll roads. The technique spread to other European districts.
"Many of the fixed-rate, long-term investors have a certain preference to triple-A bonds, and hence it was just a wonderful opportunity for the monolines," Sullivan said.
"The [monoline] business here is really developing and growing, and it's becoming a different business than what you see in the states," Sullivan said. "You don't have the same number of repeat issuers of the same kind of products here that you see in the states. Rather you have more unique or unusual type transactions."
Sullivan named the Punch Taverns as an example. In that deal, the revenue stream from Punch's 3,000-plus pubs were able to be tranched out, with a triple-A-rated senior piece, wrapped by MBIA.
1 According to numbers provided by Thomson Financial Securities Data, monoline penetration in the U.S. public asset-backed market fell to 16.7% in the third quarter from 25.3% in the second quarter.