The turmoil in the subprime market has spared no one, including monoline insurers that have traditionally kept their attachments to the triple-A level. To that end, a couple of rating agencies have expressed concern as to whether the industry's guarantors can escape the current turbulent period without taking financial hits along with the rest of the ABS business.
Moody's Investors Service recently laid out several scenarios involving U.S. subprime losses that could potentially hit these insurance companies. Fitch Ratings recently put out a similar report as well, saying that with all of the downgrades in the subprime and ABS CDO markets, the capital cushions of these insurers are currently more vulnerable.
However, market participants are still optimistic about the monoline business. For instance, Thomas Abruzzo, managing director at Fitch Ratings said, "In general, the outlook for the future of the industry is looking bright with the widening in credit spreads."
This is despite the fact that monolines are still currently in the process of monitoring and trying to get a better handle on the subprime exposures they have acquired through the ABS CDOs on their books, Abruzzo said.
With widening spreads, Abruzzo said, more opportunities exist for asset classes that are a bit more "lumpy" compared to mortgages, such as the rental car and small business sectors. He also mentioned consumer assets, which have not seen considerable activity due to tight spreads in the past.
The increased scrutiny did not deter monoline business in the third quarter. Cassie Lau, head of the Consumer ABS group at XLCA, said that her group saw strong secondary market activity in the third quarter. XLCA did a good amount of business with investors and investment banks wrapping or providing credit default swaps for triple-A and super-senior securities. However, "pricing has been higher, definitely," she said.
Although spread levels have been hard to pin down with many securities currently being sold at a discount, spreads have obviously widened out quite a bit in the last few months. This has provided opportunities for guarantors specifically in sectors that saw tight spreads previously such as student loans and credit cards, as well as other commercial assets like aircraft and franchise ABS, according to Lau. The European market might also be considered a growth area where, "We've gotten inquiries both in the prime mortgage space as well as consumer loans," Lau said.
Investors can still find comfort on two fronts when buying wrapped bonds, Lau said. First, monolines like XLCA are careful in examining the underlying credit so one can expect that the underlying transaction is solid. Moreover, the securities are wrapped by a triple-A company.
With the dislocation in the market, most prominently seen in late June and July, there has been more dialogue between the dealers, investor community and monolines, said Andrew Dym, CIFG's head of global structured finance and capital markets group. Market participants, particularly investors, have taken a step back and are a little more averse to risk. Coupled with widening spreads, this has resulted in more business opportunities for the insurers, Dym said. As it has become more expensive to move into lower rated securities, monolines are able to provide an alternative to the senior/sub structure.
"Widening spreads have resulted in demand for our product, which is a refreshing change from the last several years when monolines got squeezed as to what we could charge. We are starting to see a change in the market dynamics,"said Dym.
Moreover, widening spreads in the secondary market have resulted in repackaging opportunities for the monolines. There is increased interest seen in refinancing these securities from trading desks and investors alike, Dym said.
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