Selasa, 27 November 2012

2.1.5. The Monolines

What US government guarantees are to the GSEs mortgage bonds, monoliner

insurance companies are to CDOs. Monoline insurance companies are also

referred to as ‘monoliner insurance’ or simply ‘monolines’ because they provide

only one product, a guarantee.

In contrast to protection via a CDS contract, where the protection seller receives

a regular credit spread, monoline insurance of a bond issue is purchased through

a one-time payment of an up-front premium. Not all bond issues qualify for insurance.

Each insurer has its own

credit criteria, although the categories reviewed

are

essentially

the same as those used by the rating agencies.

Issuers that meet certain credit criteria can purchase bond insurance policies

from monolines. The insurance guarantees the payment of principal and interest in

case an issuer defaults.

 

Bond ratings are based on the credit of the insurer rather than the underlying

credit of the issuer. A municipal bond insurance policy is intended to result in significant

interest cost savings,

depending on the issuer’s

underlying credit and market

conditions at the time of the bond sale. Interest cost savings

are attributable to

a

higher bond rating – and hence lower

credit spreads – as well

as enhanced liquidity

for insured bonds.

Insurance regulations prevent property/casualty insurance companies, life insurance

companies, and multiline insurance companies from offering financial guarantee

insurance. The

monoline industry claims that it has the advantage of a sole

focus

on capital markets.

36

When the very first AAA monoline insurance, the American Municipal Bond Assurance

Corporation (AMBAC),

was

founded in 1971 it was

created to exclusively

insure municipal bonds. From

1971 to 2007 the number of insured bond issues

grew

astronomically.

In 1980, only 3% of all municipal bond issues were

insured

compared

to approximately

60% in 2007. An estimated 2.5 trillion USD of such

bonds

are presently outstanding of which more than half are insured. With

growing

 

popularity

of insurance, the number of insurers increased also. AMBAC

was

joined

by

several

other triple-A rated insurers. In addition, insurance companies with lower

 

ratings

entered the market

and offered to provide

insurance for bonds that were

 

too

small, unusual or had credit conditions that did not meet the risk criteria of AAA

insurers.

Over

time, due to the growing

competition and because growth

prospects

and

fees were

attractive,

many of the often privately held municipal bond insurers

started

to insure mortgage bonds and later also structured bonds such as CDOs as

well.

 

Source : Perguruan Tinggi Kedinasan

 

Rabu, 21 November 2012

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