After a lengthy process, XL Capital Assurance's subsidiary XL Capital Assurance UK is making headway as a contender for the growing interest in monoline sureties within the European capital markets.

"XLCA UK offers European ABS and structuredcredit investors significant fresh capacity to their monoline portfolio and credit enhancement on their bond investments of the highest quality," said Michael Rego, managing director and chief operating officer at the UK-based monoline. "Our innovative capital structure uniquely provides investors with two-tiered financial strength - we have both the triple-A ratings of the financial guaranty platform, as well as the support of a strategically committed double-A -rated parent company. We feel that our credit story is as strong as any company in the industry and are confident that European investors will appreciate this story."

Establishing the monoline business in the UK was not more difficult than their effort in the U.S. markets. As an insurer regulated by the UK-based Financial Service Authority (FSA), the new company will be able to provide wraps for capital market transactions including CDOs and other asset-backed securities in Europe. So not only would potential clients benefit from the company's triple-A monoline rating assigned by Fitch Ratings, Moody's Investors Service and Standard & Poor's, they would also benefit from a strong commitment on behalf of its parent company.

This trend of "super monolines" is catching on in the European market. FSA was the first to start it with its merger under the Dexia name, which was then followed by XLCA UK. Currently there are rumors of two other companies that are considering entering the monoline business under the same structure. "There is talk of maybe other companies looking to enter the market as monoline providers," said Rego. "Given the current level of investor concentration to the existing guarantors, there is clearly room for a few more entrants before we can even begin talk about market saturation."

Parent's role

Some in the market may question exactly what role the parent company plays in XLCA UK's business, as many are still jaded by the Hollywood funding fiasco involving the multiline insurer Lexington Plc, a subsidiary of AIG. Rego reassures that while their situation does offer the security of years of underwriting experience and credit in the industry under the XL Capital name, the bottom line is that a XLCA UK financial guaranty is a monoline insurance company. The fact that the parent company is a multiline has no bearing whatsoever on their policy wording or their commitment to pay claims immediately should they arise. "An XLCA financial guaranty insurance policy is a monoline policy pure and simple. Our policy is the same as the other financial guarantors in that it is an unconditional and irrevocable guarantee to pay," he said.

At this summer's Global ABS conference in Barcelona, the tone among European market players certainly pointed to the need for more providers, particularly because the European ABS market growth accentuated the benefits of wrapping transactions. However, with only two providers - AMBAC and MBIA - in the markets, it meant that investors were looking for diversification in their holdings. According to a Moody's report published earlier this year, investors have become increasingly sensitive to high concentrations in their portfolio. In order to properly address the rise in monoline insurance exposure, investors typically sought a two-party analysis that computed joint probability of default by analyzing the underlying ratings.

This growing investor sophistication highlights that the European market now understands the functions of a wrap. Penetrating the RMBS markets at this point is still an area where there is currently no demand or really any need for wraps. Investors looking to investigate some of the more innovative asset classes like CDOs might find monoline wraps to be a proper motivator. "The good thing about entering the European structured credit market right now is that it is still relatively young and there is much growth expected," Rego said. "The European credit markets are evolving rapidly and there are big changes yet to come. I think it's fair to say that the value proposition offered by the financial guarantors is currently not very broadly appreciated here in Europe. I am confident that this will change over the next few years and that the advantages offered to European issuers and investors alike will become more evident and that the monolines will become involved in more sectors of this market."

At present, though, the company plans to inaugurate its efforts by participating in the securitization of collateralized debt obligations backed by hedge funds and private equity, an area that moves beyond the CDO focus on corporate bonds and loans. The company's broad mandate will mirror its U.S. efforts and will look at the full range of ABS business in Europe, which includes CDOs and traditional ABS as well as newer products out on the scene on a senior subordinate basis. Its approach will be on more unique assets where it makes sense for a monoline to be involved, Rego added. XLCA UK will also set its sights on the growing opportunities in infrastructure and project- finance-type business, where a monoline's participation can add value by allowing longer-term financing for these projects. XLCA, the U.S. counterpart, was in the market last year with a E256.5 million guarantee of the Algarve toll road in Portugal. A similar deal is being planned in France.

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