As Oscar Wilde said, there is only one thing worse than being talked about, and that is not being talked about. For structured finance professionals, there can't be much that is more gratifying than being talked about at the annual Global ABS summit in Barcelona. With anyone who is anyone in attendance, it's the ultimate confirmation of your status in the industry.
So when US monoline insurer Financial Guaranty Insurance Company (FGIC) announced in June that it had hired Rick Watson, formerly head of ABS and CDOs, structured capital markets, at HSBC in London, the timing was perfect. The news went round the Hotel Arts and the adjoining bars and beach-clubs and Watson was a celebrity.
In two years at HSBC, Watson, 48, had helped increase the bank's European asset-backed origination and structuring business. In the month he left, HSBC lead managed about e1.7 billion-worth of ABS and CDO deals for clients from across the continent. By then, Watson had decided to take up a new challenge.
“This is a unique opportunity to start up a business that already has a brand,” says Watson, an American who has worked in Europe for 10 years – at HSBC, UBS, and at Bear Stearns, where he headed securitization business planning, origination and execution. “FGIC is well known in the US,” he says. “It's an AAA-rated start-up with $2 billion of accounting capital behind it.”
The big four monolines – MBIA, AMBAC, FSA and FGIC – dominate the credit enhancement and guarantee business in the US. They're growing in Europe. FSA and Ambac wrapped £1 billion of bonds issued to fund part of the London Underground PPP, for example.
But it was not until last year, when PMI, Blackstone Group, Cypress Group, and CIVC Partners bought it from GE Capital in a $2.16 billion deal, that FGIC seriously looked across the Atlantic.
“GE decided to focus on the US municipal market,” says Watson. “The change of ownership means we will look for a major expansion in structured products internationally.”
A later start in Europe also gives FGIC-wrapped bonds a scarcity value there that means they can trade at or through the spreads of FGIC's main competitors. And FGIC has no counterparty line constraints. “We can add capacity to the market in quite a large way,” says Watson.
FGIC now has nine people in London. It's aiming to have a team of 25 to 30 covering western Europe by the end of 2005. While Watson heads up structured finance, Robert Velins, who joined from MBIA a fortnight earlier, runs infrastructure. Both report to Tim Travers, the London-based head of international finance.
Monoline insurers have boosted structured finance in Europe but their presence is not a precondition of deals getting done. A second London Underground bond went unwrapped and sold well. Where big infrastructure deals were either financed by banks or wrapped bonds, the unwrapped project bond is now an alternative. “And tight spreads make all the monolines work harder,” says Watson.
FGIC has identified five markets where it can work most effectively; public finance initiative/public-private partnership, utilities, whole business and operating assets, consumer assets, and structured credit.
“It's harder to make the maths work in a tight spread environment in established markets like UK consumer assets,” says Watson. “Monolines will naturally look at new asset classes, like continental utilities and PFI/PPP.”
And if the European structured credit continues to grow, the monolines should be busy. “The super-senior element of a CDO structure is partly a product of the monoline industry,” says Watson. “We require a subordinated AAA tranche to price the super-senior tranche more aggressively. Also, Basle II will affect project finance loan origination. It encourages product diversification, not single project risk.” Project finance lenders who accept Basle II's capital charges will ask monolines to wrap their bridge facilities. “That gives the banks' credit departments comfort.”
In time, the different monolines will work together in Europe. “If we want to do club deals we can potentially syndicate or reinsure deals,” says Watson. Till then, FGIC and its peers will compete for enough dealflow to demonstrate their execution capabilities.
“Bankers will call maybe two monolines to make sure they're getting the right price and terms, but they don't have time to hear multiple presentations,” says Watson. “We have to make sure we're on that list. Investor relations is an important element of my job that I didn't have before, and it's more informal than I thought it would be, coming from origination.”