R 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: firstname.lastname@example.org Tel: 65-6430-5612
Agenda • Monoline Financial Guaranty Insurance Industry • FSA Financial Guarantees/Surety Bonds • Case Study-Hyundai Capital
The Aaa/AAA-Rated Monoline Financial Guaranty Insurance Industry • Big Four primary providers: AMBAC (1971), MBIA (1973), FGIC (1983), FSA (1985) • Recent entrants: XLCA (2000), CIFG (2002), Assured Guaranty (2003) • 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 • 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) (1) Assured Guaranty is rated AAA by S&P and Fitch and Aa1 by Moody’s.
Rating Agencies Oversight Transaction level Insurance company level • Shadow rating assigned to each insured transaction by sector specialist • Capital charges assigned for each specific exposure • 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 • Assess capital adequacy under stress scenarios • S&P’s FER (Financial Enhancement Ratings) • Measures willingness to pay claims and commitment to maintain Triple-A
AAA-Rated Monoline Financial Guaranty Insurance Industry Net Par Outstanding by Product Line – 6/30/05 International $217 Billion U.S. ABS$377 Billion 13% 23% U.S. Municipal $1,042 Billion 64% 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.
AAA-Rated Monoline Financial Guaranty Insurance Industry Annual Gross Par OriginatedTrends: Growth in Originations and Diversification 414 404 Non-U.S. U.S. ABS U.S. Muni $Bn Par 364 (1) 366 73.4 52.7 59.2 64.3 268 256 167.1 151.1 103.1 23.7 57.0 213 159.6 30.1 110.0 113.0 67.7 125 3.1 196.9 44.4 189.3 184.0 147.2 52 122.4 115.2 43 0.9 98.0 10.0 77.2 0.25 43.0 41.0 Sources: FSA, MBIA, Ambac and FGIC company reports. Includes secondary market transactions. (1) Includes ABS, MBS and funded and unfunded CDOs and CDSs.
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.
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
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
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
FSA Credit Enhancement At Work – US$160MM Hyundai Capital Auto Funding Ltd, due 2005 Credit Enhancement Package: Internal: • Junior notes equally 25% of the Pool Balance (as of closing) • Excess spread (if any) External: • Cash reserves of 3% of the Pool Balance (as of closing) • FSA Guarantee on the Swap • FSA Guarantee on the Notes
FSA Credit Enhancement At Work FSA assumed the following risks to safeguard investors: • Portfolio experiences defaults in excess of the subordination • Default risk of 3rd party to the transaction such the swap counterparty • Default risk or performance risk of the servicer • Commingling risks upon the the default of Hyundai Capital • Preferential or clawback risk upon the default of Hyundai Capital • Set-off risks which may accrue to the borrowers • Inability of the Back Up Servicer to Collect in a timely manner • Recovery process on non performing loans is frustrated or takes a long time • Fraud, or misreporting risk • FSA would ultimately assume cross-border and transferability of the Korean won if the swap provider failed under the terms of the swap agreement • Legal risks associated with untested Korean securitization laws • Downgrade risk
FSA Credit Enhancement At Work FSA’s Guarantee Delivered to Hyundai Capital Services the following benefits: • A single point of communication and decision making prior, during and post closing. • Favorable funding rates in international markets • Favorable swap pricing terms • Facilitated large placements and quick execution • First time issue in cross border markets • Documentation template for executing future deals rapidly • Data templates and data collection which allowed investors to become more comfortable, and also, eventually supported a reduction in credit enhancement in later deals. • Achieved a diversified funding base to complement domestic ABS funding • US$/Euro/Yen denominated ABS in conduits • Achieved name recognition and enlarged investor base • Yen denominated unsecured corporate samurai bonds
R Thank You