In a recent study on monoline wrapped deals and pricing, PaineWebber found that in times of trouble, insured bonds from non-top tier issuers do not price much better than those structured as senior/subordinate deals.
The results were both surprising and interesting, said Tom Zimmerman, head of ABS research at PaineWebber.
"During periods where there's general background stress, like the 1998 Russian cycle, or the 1999 Y2K, the performance of the senior/sub bonds was not much different than the wrapped bonds," Zimmerman said. "You'd sort of think that if you had an initial crisis that the senior/sub bonds would perform worse."
One reason for this, Zimmerman explained, is that in times of stress all the bonds are trading at a discount.
However, he admitted that the study was more narrowly drawn than he had hoped, as it was nearly impossible to find a pair of bonds with all characteristics identical, save the credit enhancement.
"Everybody kind of knows that senior/subs are going to trade a little bit behind the wrapped stuff in this market, but it's kind of hard to prove it," Zimmerman said.
The study turned into an analysis of wrapped versus unwrapped bonds issued by companies that were experiencing substantial financial problems.
Another more predictable finding of the analysis: during company specific stress periods - or a financial difficulty affecting one specific company - the wrapped deals do outperform their senior/sub brethren.
"A company suddenly goes into bankruptcy, or their servicer changes, or something significant, then the senior/subs can get wacked a little bit more than the wrapped paper," Zimmerman said.