Derivatives structurers are leveraging super-senior asset-backed securities tranches to get around monolines refusing to sell ABS protection on dealers' terms. The monolines insistence against trading on the International Swaps and Derivatives Association's pay-as-you-go Form I (DW, 11/4) has forced dealers to find ways of attracting investors other than monolines to sell protection in the senior-most part of the ABS capital structure. In the leveraged super-senior deals, investors receive exposure to the pumped up returns by selling dealers protection on the tranche--much as the monolines previously did.
Monolines are significant players in the ABS market and the primary sellers of protection on highly-rated ABS tranches, saidStephen Murray, director at MBIA Insurance, at the ABS West Conference in Phoenix, Ariz., two weeks ago. So far, monolines and dealers have refused to trade on each other's forms. "Dealers have to take some basis risk or find creative ways around it," saidRajiv Kamilla, v.p. in the structured products group at Goldman Sachs, at the ABS conference. Levering super-senior tranches answers that challenge and also leads to more market participation, more active trading and more efficient execution, traders said. Goldman issued one of the first leveraged super senior transactions late last year (DW, 12/9) and others are in the works (DW, 11/4).
"Levering exposure to super-senior tranches of ABS expands the role of monolines to the capital markets," said Todd Kushman, managing director and product specialist for derivatives of asset-backed securities at Bear Stearns in New York, noting that selling senior ABS to hedge funds and other institutions diversifies issuers' counterparty risk. "It's unbelievable how many people want this trade."
Officials at monoline firms said dealers ultimately will need to negotiate rather than go around them, but it is unclear how much power they have. Dealers said they will continue to consult monolines for the best trade execution, but feel less pressure with new alternatives. "Leveraging super senior risk gets around the monoline issue," Kamilla said.