Monolines have experienced an increase in requests to wrap deals in the secondary market over the past month. The uptick in interest comes even as credit default swap prices to buy protection on the monolines have ballooned.
For example, XL Capital has received more requests to do secondary wraps for commercial asset-backed securities over the past month. Demand has picked up as credit fears continue to haunt investors, said Eric Savino, director. In addition, widening spreads on ABS allow people to take advantage of negative basis trades. In these trades, parties holding wrapped paper take on a second wrap in order to book the spread differential at present value. Getting a second wrap also lowers the regulatory capital needed to be held against the investment because the risk is so remote.
Several different parties are taking advantage of secondary market wraps, Savino said. One is investors who already hold the bonds. The second is investors looking to buy wrapped bonds in the primary market, but will only do so with a second wrap. The third group is parties, such as asset-backed commercial paper conduits, selling off assets and trying to make those assets more attractive.
Providing secondary wraps is also beneficial for monolines because the risk is relatively remote. For the second monoline to pay out, the deal and the first monoline must default. At the same time, the monolines are getting paid as much for a second wrap as they would have received doing a primary wrap six months ago, Savino said.