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ABS Issuers Spurning Bond Insurance
Asset Backed Alert, Harrison Scott Publications Inc. (January 19, 2004)
Bond insurers are becoming less significant players in the U.S. securitization market.
Issuers of asset- and mortgage-backed bonds purchased guarantees for only $58.6 billion of new transactions last year, down 45% from $107.3 billion in 2002. As a result, the volume of deals wrapped by market leaders Ambac, MBIA and FSA plummeted - even as overall issuance volume shot up by 27.5%, according to Asset-Backed Alert's ABS Database.
All told, insured transactions accounted for only 7.3% of the $799.7 billion of securitized issues completed in the U.S. last year. A year earlier, bond insurers covered 17% of the market, which totaled $627.1 billion.
Issuers abandoned the guarantors primarily because bond buyers became more willing to accept tight spreads on lower-rated securities backed by mainstream assets, such as auto loans and mortgage products. Sensing an opportunity to save a few dollars on credit enhancement, those issuers opted for senior-subordinate structures instead.
Tightening spreads on uninsured deals were also problematic for bond insurers because it became more difficult for them to charge issuers high premium rates - which are usually justified because of the favorable pricing that wrapped issues garner. Stripped of their ability to turn a decent profit on many conventional securitizations, the insurers actually turned away business and chose instead to seek higher-yielding assignments covering municipal bonds.
The degree to which premiums paid by municipal-bond issuers are offsetting the lost securitization business is tough to gauge, since premiums on a typical ABS or MBS issue are paid over the life of the deal, while tax-exempt issuers tend to pay most of their premiums up-front. For their part, bond insurers claim that they remained profitable in 2003, thanks to a strong flow of business from municipal issuers that needed to refinance outstanding securities and fill budget gaps.
If economic conditions worsen, however, spreads on high-quality securitizations could widen, and that would prompt many issuers to reprogram bond insurers' telephone numbers into their speed dials. Until then, insurers that want to expand their securitization businesses will probably find the most success overseas, where only a small percentage of offerings are currently wrapped, analysts said.
In the meantime, insurers will have to be careful not to rely too heavily on municipal issues, since the Bond Market Association is predicting that the new-issue volume of such products will fall 10-15% in 2004.
The barren market for guarantees on asset- and mortgage-backed securities in the U.S. caused Ambac's insured volume to shrink to $21.9 billion, from $37.3 billion in 2002. Nonetheless, the company was able to cling to the number-one ranking among its peers for the second year in a row.
MBIA's decline was less precipitous, allowing it to leapfrog ahead of FSA into second place. It handled $15.5 billion of transactions in 2003, down from $22.3 billion. While the company insured a market-leading $7.7 billion of auto-loan issues, compared to $3.8 billion by Ambac, its $3.5 billion of mortgage-related transactions were no match for the $15.2 billion of such deals that Ambac wrapped. Those in the know say that MBIA has been the most aggressive in turning down mortgage-backed assignments, due to its belief that the sector offers a poor risk/reward profile.
Number-three FSA insured just $8 billion of deals last year, down a staggering 69.4% from $25.8 billion a year earlier. It fared poorly in both the mortgage-backed arena and the market for auto-loan bonds, where it is usually a strong player.
Fourth-place FGIC, fifth-place XL Capital and number-six ACE Guaranty actually managed to increase their shares of the market, which remain small.
Asset-Backed Alert's bond-insurer ranking includes all new issues of asset- and mortgage-backed securities sold to U.S. investors. It excludes collateralized debt obligations, commercial-paper conduit transactions and secondary-market trades.