Dubin is co-head of MBIA's London-based team, which is responsible for the insurer's business in Europe, the Middle East and Africa.
What products does MBIA insure?
MBIA is a full-service monoline insurer. We wrap the gamut of securitized asset classes, including residential and commercial mortgage-backed, future-flow-backed deals, private finance initiatives and corporate asset-backed securitizations. We also wrap collateralized debt obligations across all asset classes.
That said, the four major planks of insured issuance have historically centered on securitizations by pub companies, regulated utilities, PFIs from the U.K./large scale infrastructure projects in the U.K. and Western Europe and telecommunications companies with real estate backing. Many of these transactions have utilized the capital markets and, in turn, have been wrapped. Conversely, a relatively low proportion of MBS or consumer asset-backed deals obtain a wrap.
As with all monoline insurers, we don't take on direct corporate risk and therefore do not wrap the debt of any unsecured corporate bonds or what our industry commonly refers to as unstructured deals.
When do issuers opt for a wrap?
Issuers first have to decide to do an asset-backed deal via the capital markets before even considering a wrap, so that generally excludes an issuer that seeks funding from the syndicated loan market as well as the plain vanilla corporate bond market. Typically, long-dated transactions with an involved credit story have used a wrap in the past. This may be due to the complexity of the underlying credit and/or structural aspects of the deal or the issuer's desire to access long-dated investors. Or it may be a matter simply of interest-rate savings, i.e. the margin difference for issuing at triple-A credit spreads rather than the spread of the underlying asset. Additionally, first-time issuers have benefited from a wrap as there are occasions where appropriate pricing benchmarks are not available or investors lack the time to thoroughly analyze the transaction.
How has spread compression affected your business?
Generally, insured issuance hasn't been as robust this year as in years past, as strong issuance levels in 2003 may have deleted deal pipelines. Additionally, credit spreads have tightened dramatically and thus, certain issuers have opted to issue into the high yield and/or bank markets rather than into the securitized markets. In our view, some of these deals will eventually return to the ABS markets as many are structured on a short- to medium-term basis with some level of refinancing risk.
What will cause insured issuance to pick up again?
Insured issuance, at least in the U.K., has been driven in large part by merger and acquisition activity, in particular situations where holding companies split apart and their new owners raise individual financing against the business units being spun off. Although MBIA would not generally provide the parent holding company with credit insurance, there have been many situations where the subsidiary or de-merged entity is sufficiently robust in scope and is ring-fenced from its parent, such that a financial guarantee can be strongly considered. This is one measure that has driven the sizeable insured--as well as uninsured--deal flow in the U.K. water sector since 2001.
Insured activity is likely to be positively affected by continued privatization as well as liberalization of certain sectors across the European Union. For example, an E.U. directive liberalizing the gas and electricity sector is to come into full effect in 2007. In turn, this could create opportunities with giant European gas and electric companies as they alter their business strategies and business mix in order to accommodate the directives. Core and non-core assets are likely to be separated and each financed along a variety of formats, including wrapped debt, depending upon the particulars of the underlying deal.
What new asset classes do you see emerging?
In the U.K., there could be financing opportunities in the gas distribution sector now that National Grid Transco has tentatively agreed to hive off certain subsidiaries in this sector. Potential securitizations of the gas companies could be along the lines of transactions wrapped by MBIA in the U.K. water sector for Dwr Cymru - Welsh Water, Anglian Water Services and Southern Water Services.
How is MBIA's geographic focus changing?
MBIA has historically had a strong business presence in Continental Europe. We established our first office in Paris in 1991, one in Madrid in 1994 and another in Milan this year. While our business currently has a slight skew toward the U.K., our target is to generate a business mix that is 50% derived from the Continent and 50% from the U.K. over the short to medium term. The goal is to have a balanced book of business in Europe, by geography and asset class, so that we're not disproportionately affected by asset-class downgrades or economic slowdowns in any given jurisdiction.