The financial guarantor industry is still holding on after nearly a year of downgrades, write-downs, litigation and stagnant new issuance. While some have stopped writing new business altogether, others are taking advantage of the challenging economic environment.
Financial Security Assurance (FSA), one of two guarantors to retain its triple-A rating through the market turmoil, has in fact wrapped issuance on the structured finance side, though these deals are few and far between.
"The market has adjusted to wider credit spreads, giving FSA the ability to structure stronger transactions, better terms and attractive pricing," said Chairman and Chief Executive Officer Robert Cochran in a quarterly letter to clients sent out on May 14. Though downsized market conditions will limit new issuance, Cochran was confident in the quality of wrapped deals that his firm will put out. "With tighter underwriting and smaller market volume, but stronger underlying transactions and better pricing, we expect this to be a smaller but safer and more profitable part of FSA's future business."
In May, FSA wrapped a $750 million auto securitization: AmeriCredit Automobile Receivables Trust 2008-A-F. Deutsche Bank Securities and Credit Suisse led the transaction with Barclays Capital, Lehman Brothers and Wachovia Securities as co-managers on the deal.
The offering was upped from an original $500 million, traders said, when the deal launched. Short-term paper priced 10 basis points over interpolated Libor, while one-year triple-A paper priced at 175 basis points over one-month Libor. Two-year triple-A paper priced 265 basis points over swaps, and three-year triple-A paper priced 365 basis points over swaps.
The monoline also wrapped a $308 million auto deal in April - Consumer Portfolio Services Auto Receivables Trust 2008-A - via managers JPMorgan Securities and UBS Securities.
But with structured finance issuance at a virtual standstill, financial guarantors that remain adequately capitalized have taken advantage of potential new growth on the public finance side, especially as downgrades in the industry have limited new business opportunities for their competitors.
Assured Guaranty Corp.,which is also holding on to its triple-A rating, underwrote 495 new issue U.S. public finance transactions for $17.8 billion of par for 1H08 where it had written only $1.2 billion in 1H07.
"We don't have just one product," said Michael Schozer, president of Assured Guaranty. "We have been very active in the public finance business, and we have a very large global infrastructure business. One of the reasons why financial institutions like to have a diversified book of business is that when one business is slower, other businesses are stronger."
Double-A Is Still on Top
Lower down the credit spectrum, the outlook isn't completely dire. Despite crippling downgrades for many of the bond insurers, there are some that still manage to remain visible in the structured finance market without their coveted triple-A rating.
After being downgraded to 'AA' by Fitch Ratings and Standard & Poor's, and to 'Aa3' by Moody's Investors Service, Ambac Financial Group is trying to continue business as usual.
"We see ourselves fairly well positioned," said John Uhlein, executive vice president at Ambac Financial Group. "We are not triple-A, and we would obviously prefer to be triple-A, but double-A is not bad in the current environment."
Last week, the guarantor announced that it had partnered with the U.S. Air Force, Balfour Beatty Construction Co. and Capmark Finance to finance a $264 million Air Mobility Command West military housing transaction that will privatize 3,500 existing single-family and townhouse-style housing units at Fairchild Air Force Base in Spokane, Wash.; Tinker Air Force Base in Oklahoma City; and Travis Air Force Base in Fairfield, Calif.
The deal will be funded primarily by $264 million in taxable mortgage loans insured by Ambac. In addition to the insured loans, other sources of funds will include a $137 million subordinate loan provided by the Air Force.
Ambac also has transactions with extension features, such as revolvers that have to be renewed every year, "and we are finding that several of our clients have asked us to extend the guarantee," Uhlein said.
On the public finance side, Ambac is also seeking approval from the Office of the Commissioner of Insurance for the state of Wisconsin to pump $850 million into its long-dormant subsidiary Connie Lee. The business will focus solely on municipal and global infrastructure transactions and is targeted to be up and running in October 2008, Ambac said.
Similarly, MBIA is continuing a transformation plan announced in February that would create separate legal operating entities for the bond insurer's public, structured and asset management businesses within the next five years. Currently, the guarantor is refraining from writing new structured finance business while it re-evaluates its business model, and it has stopped writing credit derivative transactions altogether.
There are also active discussions regarding reinsurance opportunities for some of the monolines. "We are not bashful; if it is on a reinsurance basis and the economics are attractive from our own capital model standpoint, we will do it," Uhlein said. He noted that reinsurance, however, will be done only in transactions that Ambac would do on a primary basis and where the monoline has the internal credit skills.
Bandaging the Wound
But in order to write new business, the financial guarantors have had to ramp up their risk mitigation and deal modification efforts as troubled ABS sectors continue to threaten the liquidity of these insurers. One of the industries drawing the greatest attention by the monolines right now is the auction rate securities (ARS) market. The bond insurers have been very vocal about their attempts to reduce losses by finding long-term financing solutions for the ARS market, where the cost of funding now exceeds the asset yield.
"We have been very active in working with our clients and firms that were clients of other monolines to convert ARS into variable-rate demand notes or fixed-rate notes," Schozer said.
In May, Assured announced that over the past three months it had assisted issuers with more than $1.8 billion in ARS conversions. At that time, 11 conversions totaling approximately $1 billion in par had closed in 2008, and Assured said it had an additional 11 conversions in process totaling approximately $826 million.
Both Ambac and MBIA also said they are working with clients to convert these transactions. Structured finance deals such as student loan securitizations are also being restructured.
Indeed, these efforts are why the monolines feel their business model will be validated despite continued volatility in the markets. This is because many of the guarantors say they are paying out their claims as designated, which only reinforces the value proposition of a financial guarantee.
"We provide value to the financial markets in a number of different ways through our balance sheet, which includes providing liquidity and access to markets," Schozer said. "Those fundamentals haven't changed any more than if you were to have a checking account at a bank. [The necessity] doesn't change because a number of banks have had losses in the ABS and CDO areas."
As a result, industry participants were confident that the current negative outlook for the industry overall would not be a permanently looming cloud once issuance in the structured finance markets regains traction.
"We firmly believe that the ABS markets are as critical to the continued growth and financing of the global economy today as they were prior to 2007," said John Dare, managing director and interim head of global structured finance at MBIA. "Accordingly, we believe more normalized issuance levels will return in a number of consumer and commercial asset classes, as will the use of financial guarantee insurance as the structured markets regain traction."
CIFG declined to comment for this article. Calls to XL Capital Assurance and Financial Guaranty Insurance Co. were not returned by press time.
(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.