Transcript Introduction to Insured Asset Securitization

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Monoline Insurers and Credit Enhancement
Asia Pacific Finance and Development Center
Shanghai National Accounting Institute, Shanghai
November 7th-9th, 2005
Diane K.Y. Lam, CFA
Director – Asia Pacific
Email: [email protected]
Tel: 65-6430-5612
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Agenda
• Monoline Financial Guaranty Insurance Industry
• FSA Financial Guarantees/Surety Bonds
• Case Study-Hyundai Capital
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The Aaa/AAA-Rated Monoline Financial
Guaranty Insurance Industry
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Big Four primary providers: AMBAC (1971), MBIA (1973), FGIC (1983), FSA (1985)
Recent entrants: XLCA (2000), CIFG (2002), Assured Guaranty (1) (2003)
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Insure municipal/governmental, project finance and asset-backed bonds, domestically
and internationally
All rated Aaa/AAA/AAA by Moody’s/S&P/Fitch Ratings
Regulated by
– Government Agencies
– Rating Agencies
Barriers to entry
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Experienced management requirements
Strong ownership/business model requirements
Market recognition & acceptance – trading value and liquidity
Staffing infrastructure requirements
Significant capital requirements
Weak returns in early years of start-up
Underwrite investment-grade transactions
No forced acceleration – insurer is only required to make principal and interest payments
as scheduled
Low industry loss experience
(1) Assured Guaranty is rated AAA by S&P and Fitch and Aa1 by Moody’s.
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Rating Agencies Oversight
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Transaction level
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Shadow rating assigned to each insured transaction by sector specialist
Capital charges assigned for each specific exposure
Insurance company level
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Continuous review of operations, risk management practices,
profitability, liquidity and quality of management
Review capital sources and investment practices
Evaluate worst-case loss potential from claims
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Assess capital adequacy under stress scenarios
S&P’s FER (Financial Enhancement Ratings)
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Measures willingness to pay claims and commitment to maintain Triple-A
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AAA-Rated Monoline Financial Guaranty Insurance
Industry
Net Par Outstanding by Product Line – 6/30/05
International
$217 Billion
U.S. ABS
$377 Billion
23%
13%
64%
U.S. Municipal
$1,042 Billion
Total Net Par Outstanding: $1.64 Trillion
Includes: Ambac, FSA, MBIA and FGIC. Gross outstanding par for those companies was $1.9 trillion at 6/30/05.
Source: Company reports.
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AAA-Rated Monoline Financial Guaranty
Insurance Industry Annual Gross Par Originated
Trends: Growth in Originations and Diversification
414
Non-U.S.
U.S. ABS (1)
U.S. Muni
$Bn
Par
366
73.4
59.2
256
23.7
404
364
64.3
268
167.1
151.1
57.0
52.7
103.1
213
159.6
30.1
110.0
113.0
125
67.7
3.1
44.4
43
43.0
52
0.25 10.0
189.3
147.2
122.4
0.9
77.2
196.9
184.0
115.2
98.0
41.0
1985 1990 1995 1999 2000 2001 2002 2003 2004 1H05
Sources: FSA, MBIA, Ambac and FGIC company reports. Includes secondary market transactions.
(1) Includes ABS, MBS and funded and unfunded CDOs and CDSs.
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How Does a FSA’s Guarantee Work?
• Simplest Form
• Time Tested Form of External Credit Enhancement
– Unconditional
– Irrevocable
– Timely Payment of Interest and Principal
• Ability to Pay  Robust and comprehensive risk
cover, backed by FSA’s AAA financial strength
• Willingness to Pay  Unlike some history of
multiline financial guarantors, monolines like FSA
have a clean record of timely payment.
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FSA Credit Enhancement At Work – Value Added
• Benefits to Investors
– Timely payment guarantee from AAA rated guarantor
– Credit expertise and analysis on complex transactions
– Commitment to credit quality – investment grade shadow
ratings.
– Dedicated surveillance and transaction oversight
– Country risk and portfolio management
– High liquidity for investments
– A stable investment with low rating volatility and low expected
loss severity
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FSA Credit Enhancement At Work – Value Added
• Benefits of FSA Guarantee to Originators
– Lowers cost of capital
– Support to first time issuer of ABS
– Experts to help optimize transaction structures
– Simplifies risks and pricing for swaps since swap counterparty
does not take credit risk on the portfolio or SPV
– Helps Extend Tenor of Transaction
– Provides Matched Funding
– Facilitates large placements and quick execution
– Helps broaden access to capital and name recognition
– Achieve capital relief
– Deal with one knowledgeable party for critical decision making
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FSA Credit Enhancement At Work –
US$160MM Hyundai Capital Auto Funding Ltd,
due 2005
Background:
- Transaction closed in March 2002
- Originator, Hyundai Capital Services is an unrated
captive finance company of Hyundai Motors
- First time cross-border issuer
- Lack of comparable publicly available auto loan
performance data for Korea
- Company’s credit scoring system was revised in
2000 and not tested against a stressful economic
down cycle
- Structured to investment grade shadow ratings from
Moody’s and Standard & Poors
- Achieved AAA rating with FSA Guarantee
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FSA Credit Enhancement At Work –
US$160MM Hyundai Capital Auto Funding Ltd,
due 2005
Credit Enhancement Package:
Internal:
- Junior notes equally 25% of the Pool Balance (as of
closing)
- Excess spread (if any)
External:
- Cash reserves of 3% of the Pool Balance (as of
closing)
- FSA Guarantee on the Swap
- FSA Guarantee on the Notes
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FSA Credit Enhancement At Work
FSA assumed the following risks to safeguard investors:
– Portfolio experiences defaults in excess of the subordination
– Default risk of 3rd party to the transaction such the swap
counterparty
– Default risk or performance risk of the servicer
– Commingling risks upon the the default of Hyundai Capital
– Preferential or clawback risk upon the default of Hyundai Capital
– Set-off risks which may accrue to the borrowers
– Inability of the Back Up Servicer to Collect in a timely manner
– Recovery process on non performing loans is frustrated or takes
a long time
– Fraud, or misreporting risk
– FSA would ultimately assume cross-border and transferability of
the Korean won if the swap provider failed under the terms of
the swap agreement
– Legal risks associated with untested Korean securitization laws
– Downgrade risk
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FSA Credit Enhancement At Work
FSA’s Guarantee Delivered to Hyundai Capital Services the following benefits:
– A single point of communication and decision making prior, during and
post closing.
– Favorable funding rates in international markets
– Favorable swap pricing terms
– Facilitated large placements and quick execution
– First time issue in cross border markets
– Documentation template for executing future deals rapidly
– Data templates and data collection which allowed investors to become
more comfortable, and also, eventually supported a reduction in credit
enhancement in later deals.
– Achieved a diversified funding base to complement domestic ABS
funding
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US$/Euro/Yen denominated ABS in conduits
– Achieved name recognition and enlarged investor base
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Yen denominated unsecured corporate samurai bonds
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Thank You
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