Radian Asset Assurance, a bond insurance provider, is plotting to increase by 40% the par dollar amount of insurance contracts it writes this year and hopes to ride the growing wave of synthetics. The monoline guarantor has identified the collateralized debt obligation market as one ripe for growth and wants to ramp up its activities mainly in the sector, said Hao Wu, managing director in global structured products in New York.
Last year Radian guaranteed $5 billion in par value and intends to increase its book to the $7 billion mark this year. "We're turning away deals," Wu claimed, noting it traded with 20 counterparties last year and is also looking to transact with a wider spectrum of them this year. Although it would receive more rights in wrapping a deal in the primary market, Radian is also open to secondary guarantees, Wu said.
Specifically, so-called multi-sector CDOs offer the most opportunities and Radian plans to focus its efforts there because the complexities of the underlying collateral make it tougher for investors to get comfortable with it--and more likely for them to seek out a monoline. "This is a growing and dynamic sector of the market; it's less homogenous and more difficult to analyze" than vehicles deriving cash flows from traditional credit instruments, Wu explained, noting the sector accounted for the bulk of CDO issuance last year.
In the past, Radian has struggled to break into the top-tier monoline ranks because, with a double-A rating, it has had difficulty competing against other monolines, which tend to be triple-A. But Wu said there is a concrete opportunity for Radian to ramp up activities now--even as it maintains a lower credit rating than some of its competitors-- as the market for contracts referenced to asset-backed bonds evolves. "In a cash-wrapping business, triple-As have an advantage over double-As and we recognize that," he acknowledged. But Radian's rating is not as much of an obstacle in the synthetic market, because financial institutions acting as counterparties in the synthetic market, such as Wall Street dealers, are rarely rated above single-A. "We've seen the [credit] market explode with index products and [the ABS market] is moving toward synthetics. And in this world, the difference [in Radian's own rating] is very small."
An official at a rival monoline agreed the synthetic market offers more of a level playing field for Radian, but said a guarantee from a double-A entity remains less attractive than one from a triple-A counterparty, in any market.
Wu is in charge of two groups: one that plays in structured financial products such as CDOs and credit derivatives and another that deals with straight ABS. Radian will maintain its activity in its cash bond wrapping business in certain areas, such as sub-prime autos, but intends to grow the financial product side most.
