Key points:
- Assured Guaranty is in a stronger competitive position
- Its exposure to structured product is decreasing
- The upgrade is reflected in the individual ratings of operating subsidiaries
The rating upgrade reflects the Standard & Poor’s view that Assured Guaranty Ltd (Assured) retains its strong competitive position against new entrants to the financial guaranty industry and that with the passing of time the group has become far less exposed to legacy structured products which caused significant issues and downgrades to its former peers.
The financial guaranty business is effectively a provider of insurance for bond holders, called credit wrapping. The traditional business was the insurance of municipal and infrastructure bonds. In return for this insurance the bond issuers would pay a fee to the guarantor, and for this fee, the issuer was able to utilise the insurers higher credit rating to achieve a lower spread on their bonds due to the decreased credit risk.
In the build up to the GFC, financial guarantors increasingly insured structured products, including products which contained exposures to the US housing market which ultimately defaulted. On default, these insurers were called upon to cover the losses of the bond holders and the sheer volume of default caused a number of the insurers to get into financial trouble themselves. For example, AMBAC Financial Group Inc., one of Assured’s pre-GFC peers went from a AAA rating in 2008 to CC in 2009 and to D following declaring bankruptcy in 2010. Assured however had taken a far more cautious approach to structured products than its peers – a decision which proved correct – and as a result its rating never dropped below AA-, a reflection of the confidence the ratings agency had in Assured’s underlying book.
With Assured now in a strong competitive position (given its pre-GFC peers have disappeared) and the quality of post-GFC assets available for insurance the rating agency has seen fit to upgrade the rating to AA, a sign of growing confidence in the group.
We have maintained for some time that we were confident in Asssured’s position in relation to its ability to back-stop any default on Australian bonds and have had the view that the Australian bond market continues to miss-price bonds which enjoy ‘credit wrapping’ from Assured. We maintain this position and view any bond in the Australian market with credit wrapping from Assured Guarantee to offer strong value at current pricing.
The credit rating upgrade is positive for the Australian dollar bonds that are “wrapped” by Assured. Please call your dealer to find out more.