Bond insurer
Bond insurers are specialized insurance companies that insure bonds against the risk of default . In the United States these companies will monolines (or English monoline insurer ) called.
General
They are called monoline because they only the insurance type of bond insurance ( English bond insurance run) and a single-product company represent. With the exception of Pfandbriefe , bonds are usually uncovered , meaning that their creditors ( investors ) are exposed to the issuer's risk of default . This issuer risk is reflected in the rating for these bonds, so that badly rated bonds ( junk bonds ) can not be acquired by institutional investors (such as investment funds , especially pension funds , or insurers ) due to legal regulations. To close this gap in the market , the bond insurers offer the creditor a risk transfer in the form of a guarantee that relieves the creditor of the default risk of the bond.
Business process
The bond insurers cover the investors' creditor risk against payment of an insurance premium . The bond insurance consists of a default guarantee that covers the default risk of the issuer or its bond. In the event of an insured event, the bond insurer pays the policyholder the bond amount plus any outstanding interest . If the policyholder is a credit institution , they may base their risk weight on the (better) rating of the bond insurer instead of the (poorer) rating of the bond or the issuer . The credit institutions are allowed to declare the bond insurer to be the ultimate liability carrier because he has to pay in the event of an insurance claim (Art. 114, 137 f. Capital Adequacy Ordinance ). This so-called surety substitution means that the loan with the originally higher risk weight can be replaced by the lower risk weight of the bond insurer ( English credit enhancement ). There are also comparable regulations for investment funds and insurers.
Be insured US state bonds ( english state (government) bonds ), municipal bonds of US municipalities ( English municipalities ), but also corporate bonds (junk bonds), collateralized bond obligations , commercial mortgage-backed securities and subprime bonds . The insured bonds (also "wrapped bonds" english bonds wrapped ) called.
US municipalities
Highly indebted US municipalities do not receive any disproportionate state transfer payments via the US financial equalization scheme , but have to improve their financial situation themselves ( principle of subsidiarity ). If this fails, the legislature with Chapter 9 (especially for municipal subdivisions English municipalities ) provided a specific bankruptcy protection variant. According to this, in the worst case scenario, municipal creditors even have to reckon with a bad debt loss during the restructuring , because US municipalities - unlike German municipalities - are not incapable of insolvency . For this reason, there is the option of subjecting “ municipal bonds ” to insurance protection against late payment and default by the issuer through a monoliner. For this purpose, the Municipal Bond Investors Assurance Corporation was founded in 1974 . If a monoliner with a better rating guarantees “municipal bonds” with a lower rating, these will receive the guarantor's better rating as part of the surety substitution .
market
The bond insurance market is significant only in the United States. This is mainly because sub-state entities can go bankrupt and this increases the need for bond insurance.
As a rule, the monoliner's insurance premium corresponds exactly to the credit spread , i.e. the difference in yield between a government bond rated with triple A and the insured bond.
Monoliners have a high actuarial debt ratio ( ) of 150, which means that the equity ratio is only 33%. This ratio is too low in view of the low risk diversification . The monoliners, which were initially well rated, were downgraded by the rating agencies from 2008 , which had a negative impact on their default guarantees. The one-sided business leads to high systemic risks , because monolines can get caught in a company crisis if many municipal bond issuers trigger an insurance claim. The result can be enormous selling pressure on US bonds.
In the wake of the subprime crisis in 2007 , this topic sparked heated political discussions in the USA in view of the unrest in the market for municipal bonds , which are part of the public sector . While public debtors were only given an A rating by the rating agencies, as in the case of the state of California , the two largest bond insurers MBIA and Ambac continued to receive the top AAA rating, despite their financial difficulties. In doing so, the rating agencies used different criteria than they did for companies for the evaluation of local authorities and public-law institutions for no good reason. This absurdity, in which the Municipals have to "highly insure themselves" with the financially troubled bond insurers on AAA, led to an ultimatum from a congressional committee to the rating agencies to make the necessary corrections. The agency Moody's admitted in a study that if the same criteria were applied, all US states except Louisiana would actually receive the top AAA rating. These two bond insurers were in their June 5, 2008 credit rating from Standard & Poor's downgraded to AA. With this they lost a large part of their business field, namely the insurance of municipal bonds. Nouriel Roubini of the Stern School of Business estimated that this resulted in losses of approximately US $ 150 billion for counterparties as the collateralised securities could no longer remain in the AAA category.
The largest bond insurer is MBIA , the second largest provider is Ambac Financial Group , followed by Financial Guaranty Insurance (FGIC).
See also
Individual evidence
- ↑ Tony Merna / Faisal F. Al-Thani, Corporate Risk Management , 2005, p. 101 f.
- ↑ The Bond Market Association (Ed.) / Judy Wesalo Temel, The Fundamentals of Municipal Bonds , 2001, p. 14
- ↑ Katja Brandtner, Systemic relevance (in) the insurance industry? , 2014, p. 57 FN 266
- ↑ Dieter Farny , Versicherungsbetriebslehre , 2011, p. 877 f.
- ↑ NZZ of March 13, 2008, dispute over ratings for US municipal bonds
- ↑ Bloomberg, June 5, 2008, Monoliner lost Business