A flurry of dealer activity in the super-senior tranche of synthetic collateralized debt obligations this year has snatched business from the monolines, highly rated insurers who only sell protection on low-yielding securities. The boom in leveraged super-senior tranches has led to the monolines facing stiff competition in a sector where the insurers were the sole player, said Anne Wrobel, a director at Financial Security Assurance in London. "It has hurt our market," she said of dealers writing protection on super senior tranches.
In addition, the competition has squeezed returns on deals referencing super senior tranches and forced the monolines to sell protection with increasingly lower yields. "We continue to do deals with spreads which would have been unacceptable a year ago," Wrobel said, adding competition with dealers is acute in the five-year maturity market. Wrobel predicted the monolines should regain their dominance in super senior tranches when the credit cycle shifts, leading dealers back to value in the mezzanine and equity tranches.
