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Monoline Crisis Doesn't Spell End of Wraps in Emerging Markets: But Business Will Be Sporadic at Best in 08
Asset Securitization Report--SourceMedia (March 31, 2008)
With the mood in the markets still dour and leading bond insurers declaring structured finance off-limits for either six months or until further notice, it may seem premature to canvass the monolines on where they stand right now in respect to emerging markets.
But scratch beneath the dead calm of the surface and there's a buzz of activity, much lower-key than a year ago, but there nonetheless.
The monolines least affected by the subprime debacle, Assured Guaranty and Financial Security Assurance (FSA), are actively bidding on emerging market deals - the former having closed one earlier this month. Even players that aren't insuring deals for a time aren't all twiddling their thumbs until the crisis blows over. They continue to talk to potential clients.
"I think it'll have a positive impact on the market share we'll end up getting," said Jorge Gana, managing director at Assured, which provided a wrap on a six-year, $250 million transaction from Banco do Brasil that collateralized diversified payment rights (DPRs) and closed March 5. "We've had more inquiries since the BdB deal and right before it. We anticipate we'll do more," he said.
The Brazilian DPR sector is the most obvious space for the monoline sector to stay alive right now in EM. Financial future flows in emerging markets have an excellent track record, with a number of deals surviving epic currency and political crises.
What's more, the tougher climate is making securitization more attractive for Brazilian banks that had been either staying out of future flows or issuing only sparsely because of more favorable pricing terms in the loan and unsecured bond markets. The liquidity crunch that has humbled originators across the world has been less severe in Brazil, but its intensity is strong enough to tip the scales toward DPR issuance by the likes of Bradesco, Banco Itau and Unibanco, apart from Banco do Brasil.
Of course, they don't have to go wrapped. At about the same time as Banco do Brasil, Bradesco issued a six-year DPR transaction for $500 million. But the pricing terms raised suspicions that the deal didn't go to market investors.
Like Assured, FSA is open for business in the future flow space. Rick Holzinger, managing director of corporate finance at the insurer, said that the firm has room for additional exposure to Brazil, provided that the transactions in question fit the insurer's criteria.
The FSA name is something that DPR issuers are certainly interested in, according to sources. But one barrier has reportedly been the terms that FSA is seeking, which might be too steep even in today's illiquid environment.
"Our pricing generally reflects the level FSA believes represents a fair risk/return for a particular transaction," said Holzinger in an e-mailed response to questions. "Recent pricing benchmarks for the future flow deals (of which there were none four to five months ago) will obviously be factored into our pricing."
For the other bond insurers, future flow deals don't appear to be in the cards for the short term. Ambac is still talking to people in the market, but the future flows class is included in the moratorium on structured finance investing that the bond insurer has implemented for roughly six months from the end of February as it builds up its capital base, according to Diana Adams, managing director at the agency.
A press person for MBIA, which also declared a six-month moratorium, didn't respond to requests for comment as of press time. An FGIC press official reiterated the company's recent statement that the guarantor would take on no new business for an undisclosed period of time and declined to comment further. An XLCA official didn't return a request for comment as of press time.
Mexicans Grow Allergic to Wraps
In Mexico, another market that had recently seen the arrival of monoline insurers, the wrap isn't welcome anymore, even from so-far squeaky clean FSA and Assured. Convincing local investors that not all wraps are created equal will likely be an uphill battle.
"There's profound uncertainty that [the situation with monolines] isn't going to be resolved in the short term," said Tonatiuh Rodriguez, a fund manager at Afore XXI. "We're not differentiating among monolines, nor do we have the tools to differentiate among them."
A source at a mortgage originator said that FSA could run a more effective campaign in distinguishing itself from the other bond insurers. So far the efforts have been through e-mails as opposed to more assertive face-to-face meetings, he said. "FSA's principal focus in Mexico since establishing our presence there has been on educating the markets [in regards] to the benefit of the monoline wrap in general," Holzinger said. "We believe investors will distinguish for themselves among the various monolines based on their perception of a monoline's relative financial strength."
The monoline remains open to wrapping all asset classes in Mexico, but consumer assets and infrastructure have been and will continue to be its primary focus.
FSA and MBIA are the only monolines with licenses to wrap public deals in Mexico's domestic market. Given its current situation, Ambac has its application on hold but hasn't withdrawn it, Adams said. She also pointed out that the current moratorium on structured deals doesn't include infrastructure transactions in more developed emerging markets such as Mexico. But the timeframe required to execute a deal in that sector suggests there is no activity on the horizon. "I don't expect [us] to do any emerging market deals within the next six months," Adams said.
Regardless of what the current perception is of the monoline wrap in Mexico, Ambac has so far retained Carlos Serrano, hired in January 2007 expressly to focus on the country.
Assured, which has not applied for a license in Mexico, doesn't expect to do so in the medium term, Gana said. "We think we'll find enough opportunity in cross-border deals and re-insuring deals." Focusing on the cross-border could also help Assured sidestep the issue of Mexican investors' current aversion to the wrap.
As for MBIA, the other monoline with a Mexican license apart from FSA, it wasn't clear where the agency stood with regard to its possible involvement in a financing package of a highway concession won by local construction company ICA and Goldman Sachs in the summer of 2007. MBIA was attached to a funding proposal as potentially insuring a bond that would take out part of loan financing for the roughly $4 billion project. Goldman didn't return a request for comment as of press time.
No Appetite for Turkey
On the Turkey and CIS front of emerging markets, the chances of monoline activity look nearly nil. "To date, we are very comfortable with the performance and exposure levels of our current Turkish DPR portfolio relative to our capital base, and, at this time, not looking to change," said Rob Carney, director of European structured finance at FSA. Assured Turkey sounded a similar note. "In 2007 we chose for internal reasons to take a pause in our Turkish growth," said Gana. "We're unlikely to wrap another deal in the course of this year in Turkey."
This is a stark contrast to two years ago, when all the leading monolines joined a bonanza of wrapping deals in Turkey. The fever had died down by the beginning of 2007.
Kazakhstan is another country that had attracted bond insurers before much of the guarantor industry and the leading Kazakh banks began facing ratings trouble. Now neither FSA nor Assured are seeking out deals in the country.
One area where emerging market deals don't have much to worry about is the capital charge. While the subprime crisis and its knock on effects have spurred the rating agencies to reconsider the capital charge assessed on the monolines for certain products, for now at least, future flows and other areas of emerging markets won't be affected, said officials at Moody's Investors Service and Standard & Poor's. A Fitch official didn't return a request for comment as of press time.
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