As problems in the auction-rate and variable-rate markets persist, many of the financial guarantors are increasingly making an effort to work with issuers to find solutions to their dislocated debt problems.
At least two insurers - Ambac Assurance Corp. and MBIA Insurance Corp. - have called attention to their efforts in recent days, but in fact a handful of insurers say they have been working with issuer clients since the troubles with failed auction-rate deals began earlier this year.
In addition to Ambac and MBIA, XL Capital Assurance Inc., Financial Guaranty Insurance Co., CIFG Assurance NA, and Financial Security Assurance Inc. said they too have taken an active role.
A spokeswoman for Assured Guaranty Corp. said that the insurer's limited exposure to the auction-rate market prior to the fourth quarter of 2007 meant it did not provide policies for any of the current deals. She did say the company has received an increasing number of calls from issuers seeking help restructuring and reinsuring auction-rate programs.
The insurers' efforts come at a tough time for the industry. With many being downgraded below triple-A by at least one of the rating agencies, the monolines are doing their best to assuage a market that may be starting to question the value of bond insurance. Katie D'Angio, co-head of public finance for CIFG, may have said it best:
"CIFG is committed to maintaining its long-term relationships with clients and issuers in the ARS and variable-rate debt markets and will be working closely with them to navigate the extraordinary conditions in the marketplace," D'Angio said.
The monolines' cooperation in this regard is critical: insurers must give their consent to issuers with insurance policies looking to convert from auction rates to other interest modes. And beyond giving consent, in some cases insurers have taken a more hands-on role.
In recent months, financial guarantors have helped to add liquidity enhancement, agreed to allow issuers to buy their own auction rates and keep the insurance policy, or agreed to alter the termination-event language related to liquidity facilities so it is not tied to the rating of the bond insurer. In other cases, some insurers have helped to put in place a mandatory tender where there had not been one before.
"We have been processing consents for a wide range of issuers and have successfully approved numerous amendments," said Ambac chief executive officer Michael Callen.
MBIA Insurance said it has helped issuers convert $1 billion of short-term variable-rate securities into long-term, fixed-rate bonds since the beginning of the year. XL Capital Assurance has also successfully restructured a number of deals.
"These solutions are being successfully executed in various forms with over 10 initiatives closed to date, representing over $2 billion in gross exposure," said Ed Hubbard, president and chief operating officer of XL Capital Assurance.
In the case of MBIA, managing director Tim McKeon said the converted $1 billion of short-term debt was not tied to swap agreements, which would have made the restructuring far more difficult and expensive.
"Issuers willing to do this are typically the issuers not involved in a swap," McKeon said. "Issuers that have swaps in place and that have synthetically converted to fixed rate, we are working with them to keep the floating rate."
For those clients with exposure in the variable-rate demand market, some of the financial guarantors have worked closely with liquidity banks. McKeon said MBIA has worked with a number of banks and in some cases has provided insured liquidity itself through a standby bond purchase agreement. Both MBIA and Ambac have worked with LOC banks to share the credit risk on bank-sponsored letters of credit.
Other bond insurers have been less vocal about their own efforts, but most say they have dedicated staff and resources to address the problems. Ambac and CIFG have named specific internal teams for the purpose, while XL Capital Assurance said it has worked with issuers since the problems began, and FGIC has set up "a process with dedicated resources," according to Jeffrey Fried, head of public finance there.
At the end of March, XL Capital said it would let go of 60 public finance employees.
FSA said it continues to help issuers under what it sees as its normal business operations.