Guess who’s back?

“Guess who’s back, back again / Shady’s back, tell a friend.”

I’m not sure how many of our readers are familiar with US rapper Eminem and his alter ego Slim Shady, but the above lyrics, if you replace ‘Shady’ with ‘Assured Guaranty’, perfectly encapsulate January’s comeback deal by the monoline insurer – the first post-crisis monoline transaction in Europe, according to Assured Guaranty itself.

In this sense, the deal – which saw Assured Guaranty replace Ambac as guarantor for a £92.7 million (€117.6 million; $150.3 million) bond backing the UK’s Worcestershire Hospital – serves as the perfect calling card for the firm, announcing to the market that it’s back in the business of insuring European infrastructure debt.

Canny

Dominic Nathan, managing director and head of infrastructure at Assured Guaranty Europe, tell the story behind the deal – which was a year in the making – it’s hard not to appreciate the monoline insurer’s canny strategy.

“We spent a lot of time speaking with bond investors with portfolios of wrapped [infrastructure] bonds, who complained about being stuck with non-investment grade bond wraps from other monolines. So we went to the Association of British Insurers to identify some of these transactions, so that these bonds that have no rating would benefit from Assured Guaranty’s Aa3 rating,” Nathan explained.

That’s smart thinking, as it allows Assured Guaranty to exploit the many disgruntled bondholders left holding portfolios of ‘junk’ infrastructure bonds, after most monolines fell way below investment grade in the aftermath of the 2008 financial crisis. As long as they are willing to pay Assured Guaranty for the privilege, the monoline insurer can lend its investment grade rating to their infrastructure bond portfolios.

But this is not the only type of deal Assured Guaranty is targeting. According to Nathan, the monoline is “absolutely focused on new deals” and will be wrapping bonds issued for new projects. In short, Assured Guaranty is back, open for business and you can expect to hear about its new deals as the year progresses.

Of course, for those with fond memories of the £100 billion European infrastructure bond market that thrived between 2000 and 2007, it will be very tempting to see Assured Guaranty’s comeback as a sign of a broader revival of the monoline industry.

But to all those eager to roll back the years, a word of caution: Assured Guaranty’s comeback, as positive as it is for the infrastructure industry, is unlikely to herald the return of the monoline market. And there’s a very simple reason for that, highlighted by an analyst at one of the top two ratings agencies: Assured Guaranty is the only monoline left with an investment grade rating.

This means it’s the only monoline in the business capable of wrapping infrastructure bonds with the investment grade rating the capital markets desire. It also means it will have a finite capacity to do this type of deal.

In sum, it’s definitely good news for the industry to see a much-loved product – the monoline wrap – return to the European market almost four years after the Big Bang. But the story, thus far, is mostly about Assured Guaranty only.

When asked if Assured Guaranty’s comeback was in any way a response to other credit enhancement initiatives such as the European Investment Bank’s Europe 2020 project bond initiative, or, for that matter, Hadrian’s Wall – the debt fund set up by the former head of Assured Guaranty Europe, Marc Bajer – Nathan said: 

“For sure we want to reclaim our market.” Without commenting on those alternatives, Nathan highlighted what may turn out to be Assured Guaranty’s best competitive advantage:

“Investors know our product and like the model they were used to. Using something they know is reassuring,” Nathan explained.  But perhaps in recognition of Assured Guaranty’s unique position in the monoline market, he added that the firm “welcomes all forms of credit enhancement”.

As the Elvis of hip-hop (might have) proudly proclaimed: “[Assured Guaranty’s] back, tell a friend.”