Dexia Holding SA · EURONEXT:DEXB
Dexia Holding SA — Investor Presentation (November 2002)
67 slides from Dexia Holding SA's investor presentation, Nov 19, 2002
Slide 1: FSA: update on business strategy and risks
Analysts’ meeting FSA: update on business strategy and risks November 19, 2002 Paris
Slide 2: Agenda
Agenda ! Introduction ! The Bond Insurance industry ! FSA – the company ! Municipal Finance ! Asset-Backed Securities ! Asset Management ! Conclusion
Slide 3: The AAA-rated monoline bond insurance industry
The AAA-rated monoline bond insurance industry ! Four primary providers: AMBAC, MBIA, FGIC, FSA ! All AAA-rated companies ! Insure municipal and asset-backed bonds ! Regulated by insurance authorities: license to insure only this type of risk (monolines) ! Monitored closely by three rating agencies
Slide 4: A high growth business
A high growth business (Par Originated) 366 350 International 59 U.S. ABS $Bn 300 U.S. Muni 294 268 Par 256 47 160 245 250 24 57 43 200 116 110 150 125 113 102 3 100 45 52 147 43 1 122 131 50 0.3 10 98 100 77 43 41 0 1985 1990 1995 1999 2000 2001 9/2001 9/2002 Sources: FSA, MBIA, AMBAC and FGIC comp
Slide 5: Monoline bond guarantor industry market shares
Monoline bond guarantor industry Market shares – Jan.1, 2001-Sept.30, 2002 (Gross Par Insured) U.S. Municipal Market (1) U.S. ABS Market (2) International (2) AMBAC 23% AMBAC FGIC 23% FGIC 22% 5% AMBAC MBIA 33% Other 39% 2%(3) MBIA FSA MBIA FSA FSA 35% 32% 28% 26% 33% Total Volume: $258.4Bn Total Vo
Slide 6: Credit Risk vs. Commercial Banks
Credit Risk vs. Commercial Banks ! Over the past 5¾ years, FSA’s actual incurred losses (case reserves) have equaled 0.5 bps* of average net par which is less than 1% of the 60.5 bps experienced by U.S. commercial banks from 1997 to 2001 * Excluding the impact of the Single Name CDS program terminat
Slide 7: FSA – the company
FSA – the company ! Founded in 1985 ! Rated Triple-A by S&P, Moody’s, Fitch, R&I ! Proven track record in quality underwriting and loss mitigation controls From inception to Sept. 30, 2002: $ 413,800 million net par insured $ 145 million cumulative losses* $ 43 million single-name CDS termination fe
Slide 8: Ownership
Ownership Rating AA Dexia Group 97.7% AA FSA Holdings 100% AAA FSA Inc
Slide 9: A triple-A business (1)
A triple-A business (1) ! Capital Resources ! Statutory Capital: $ 1.7 Bn as of September 2002 ! Claims Paying Resources*: $ 3.6 Bn as of September 2002 ! Risk Management ! Investment grade underwriting standards ! Low-loss severity and high recovery potential ! Single and Aggregate risk limitations
Slide 10: A triple-A business (2)
A triple-A business (2) ! No forced acceleration ! Earnings stability ! Future revenue from business already written creates stable earning base ! Capital and reserves in high-quality investments (average AA)
Slide 11: A profitable business
A profitable business Since the merger with Dexia, ABV has grown at annualized rate of 19% pre-merger post-merger $110 Compound Annual Growth ABV Rate Since Year-End 1995 per $100 Share ABV: 16% $90 $80 $70 $60 $50 $40 ABV $30 $20 IPO 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 9/02 ABV = Book v
Slide 12: Predictable revenues
Predictable revenues ! Future revenue from business already written creates a stable earnings base for FSA ! Approximately 90% of any year’s revenues are known at start of that year Revenues if FSA wrote no If FSA continues to write at 2001 levels, $MM new business after 12/31/01. revenues will be s
Slide 13: FSA's business: insuring high quality credit risks
FSA’s business: insuring high quality credit risks
Slide 14: FSA's portfolio of insured transactions is highly diversified
FSA’s portfolio of insured transactions is highly diversified Public Infrastructure Other Municipal (1) 1% 3% 3% Transportation 2% Healthcare 8% Utility 31% Pooled Corporate 2% Housing 10% Tax-Supported Non-General Obligations Consumer General Obligations of Cities, 8% Receivables States and School
Slide 15: Key risk characteristics of Municipal / ABS businesses
Key risk characteristics of Municipal / ABS businesses Municipals Asset-backed Low Default " Municipal " Bankruptcy remote Frequency bankruptcies structure and extremely rare overcollateralization make defaults rare Low Loss Severity " Rare defaults usually " Collateral cashflow lead to only keeps l
Slide 16: Underwriting process
Underwriting process ! Each transaction must be investment grade, and asset-backed or municipal to mitigate loss ! Each transaction is subject to an extensive review by FSA of all potential risks ! Municipal: ability of obligor to meet debt service under adverse economic scenario ! Asset-Backed: ass
Slide 17: Use of reinsurance
Use of reinsurance Risk Exposure (in M$) Triple-A Single-A Quota FSA Net FSA Net Share Retention Retention Layered Loss Par Amount (in M$) Layered loss reinsurance can be used to adjust the risk profile of a transaction
Slide 18: Reinsurers
Reinsurers ! Total par ceded : $87 billion of which 99.8% is ceded to AAA or AA Reinsurers ! Main Reinsurers: Par Ceded ! Tokio Marine and Fire Insurance Co Ltd (Aa2/AA-) $23.8 billion ! ACE Guaranty Re Inc (Aa2/AAA) $20.6 billion ! Radian Reinsurance Inc (Aa2/AA) $16.0 billion ! American Re-Insuran
Slide 19: FSA Insured Portfolio
FSA Insured Portfolio Categorized by Shadow Rating (Net Par Outstanding) Overall Combined (1) Municipal ABS (1) (Incl. ABS & Muni) $127.9 Bn $130.0 Bn $257.9 Bn AAA AA 61% 23% A AAA AA 58% 31% 27% A NIG AA 34% NIG 1% NIG BBB 20% < 1% BBB A 1% BBB 14% 7% 11% 11% The pie charts on this page demonstrat
Slide 20: Municipal Finance
Municipal Finance
Slide 21: Principle
Principle Each transaction insured by FSA must be secured by either a pledge of taxing power by an investment-grade municipality or a dedicated, investment-grade revenue stream from an essential public service
Slide 22: Municipal finance (1)
Municipal finance (1) ! Public Finance: bonds issued by governmental entities (General Obligation, Revenue Bond) ! Other Municipal Finance: bonds issued by not-for-profit entities operating in essential public services (e.g., Healthcare) ! Infrastructure Finance: essential infrastructure financings
Slide 23: Municipal finance (2)
Municipal finance (2) ! Underwriting Principles ! Investment-grade quality ! Providers of essential governmental services ! Low risk with strong security provisions ! No forced acceleration of payments ! Amortizing debt with no involuntary bankruptcy ! Loss experience ! FSA has had only four municip
Slide 24: Public finance
Public finance ! General Obligations ! secured by municipality’s pledge to levy taxes to service debt ! Other Tax-Supported Issues ! secured by specific tax revenues, such as sales taxes or special assessments ! Revenue Bonds ! secured by dedicated revenue streams from essential public services such
Slide 25: Other municipal finance Example: Healthcare
Other municipal finance Example: Healthcare ! Healthcare is 2% of total FSA par outstanding ! Limited to non-profit community hospitals or hospital systems that provide an essential public service ! Conservative underwriting standards ! Dominant market position ! Strong franchise ! Good financials w
Slide 26: Infrastructure finance (PFI / Project Finance)
Infrastructure finance (PFI / Project Finance) ! Net exposure of 0.7% of total portfolio ! Conservative Underwriting Standards ! Local currency risk only ! Sovereign foreign and local currency ratings to be at least investment grade (100% AA or better local currency ratings at September 2002) ! Esse
Slide 27: Asset-backed securities
Asset-backed securities
Slide 28: Principle
Principle Each individual transaction insured by FSA is written with sufficient protection, in the form of asset overcollateralization, excess cashflow and/or other protections, to withstand substantial deterioration before FSA would pay a claim
Slide 29: Key ingredients of the ABS business
Key ingredients of the ABS business ! Modeling ! Proprietary models to evaluate expected losses and appropriate levels of protection ! Structuring ! Bankruptcy protection ! Collateral coverage ! Monitoring – Surveillance ! Triggers allowing cash to be retained if the portfolio deteriorates ! Rights
Slide 30: Sources of collateral protection
Sources of collateral protection ! Overcollateralization ! Cash deposit ! Excess cash-flow received over time ! External credit support (Letters of Credit, reinsurance)
Slide 31: Financing of a $1,000 asset-backed transaction
Financing of a $1,000 asset-backed transaction Par Amount Senior Tranche Insured by FSA ($850) Junior Tranche ($100) Equity Tranche ($50) The Junior and Equity tranches finance overcollateralization for the Senior Insured tranche.
Slide 32: Interest spread and overcollateralization provide protection
Interest spread and overcollateralization Interest provide protection Rate Total revenues generated by the pool of assets = $ 120 per year 12 % Available to cover defaults and remunerate equity investors 8% Total debt service required by the Senior Insured Tranche = $ 68 per year Par Amount $850 $95
Slide 33: Loss tolerance of an asset-backed transaction
Loss tolerance of an asset-backed transaction Cumulative losses (%) 16% 14% Break Even Coverage 12% 10% 8% 6% Cumulative Loss Trigger (traps cash-flow) 4% 2% Expected Losses 0% 0 6 12 18 24 30 36 42 48 54 60 Months Protections must be built to withstand 2 to 5 times expected losses, depending on the
Slide 34: Underlying Assets
Underlying Assets ! Consumer receivables ! Car Loans, Credit Cards… ! Prime and Sub-Prime ! Mortgage Backed Securities (MBS) ! Residential Mortgage Loans ! Prime and Sub-Prime ! Pooled Corporates ! CDS ! CDOs (CLOs and CBOs) ! Investment Grade & High Yield
Slide 35: Types and quality of asset-backed securities insured by FSA
Types and quality of asset-backed securities insured by FSA A 11% BBB 8% NIG Pooled 1% Consumer Corporate AA Receivables 61% 25% 16% Super AAA (*) 24% MBS 19% Other Asset- AAA Backed 31% 4% • Net par outstanding • Internal ratings expressed in industry terms • As of November 2002 (*) Super AAA” mean
Slide 36: Consumer receivables
Consumer receivables ! FSA is a leading provider of Credit enhancement for securitization of auto loans (89.6% of the $20.4 billion consumer receivables portfolio) and credit cards (8.3%) ! Main original lenders / servicers: ! AmeriCredit Financial Services, Inc. ($8.8 billion) ! WFS Financial Inc.
Slide 37: Americredit program
Americredit program ! Cash deposit + Overcollateralization + First Loss Protection provide for protection in excess of 12% of Insured Notes (see next slide) ! Future spread (approximately 10% per annum) received over time will provide additional protection ! Cross-collateralization of all existing t
Slide 38: Case of Americredit
Case of Americredit Overview of the 17 existing transactions* ($Bn) 0,39 Cash deposit 0,65 Overcollateralisation First loss Protection 0,34 Quota share Reinsurance Total auto loans 11,36 11,7 = 12,35 Notes issued and insured by FSA = 11,70 Total portfolio = 12,74 * As of Sept. 18, 2002
Slide 39: Americredit performance - Three types of Triggers
Americredit performance - Three types of Triggers ! Rolling delinquency (our “early warning”) ! Cumulative default ! Cumulative losses
Slide 40: Americredit performance Triggers: Two levels of Breach
Americredit performance Triggers Two levels of Breach ! A Level I Breach results in the trapping of available cash flow until the trigger is cured or the cash reserves reach a specified level ! A Level II Breach results in an event of default across the entire program, permitting FSA to ! Trap all a
Slide 41: Waivers
Waivers ! It is not uncommon for FSA (as for other monolines) to provide at least temporary waivers for some or all of the remedies associated with trigger breaches in its ABS transactions ! Triggers are set at tight levels to give FSA control in the event of rapid deterioration in performance ! FSA
Slide 42: Example: Americredit
Example: Americredit In September, 2002: ! FSA agreed to increase slightly the delinquency trigger levels, for a six month period only ! Cumulative default and loss triggers were not waived ! FSA received a modest increase in its compensation (10% increase in premium rate and warrants in Americredit
Slide 43: Residential mortgages
Residential mortgages ! FSA is a leading provider of Credit Enhancement for securitization of mortgage loans (portfolio of $24.8 billion of net exposure) ! In a study this fall of sub-prime transactions aged over 18 months, FSA estimated its weighted average remaining break-even loss coverage multip
Slide 44: Underlying quality of FSA-insured mortgage-backed obligations
Underlying quality of FSA-insured mortgage-backed obligations AA 35% A 13% BBB AAA 9% 41% NIG 2% Net losses, inception to date = 3.6 bps of net original par • Net par outstanding • Internal ratings expressed in industry terms • As of November 2002
Slide 45: Pooled corporate
Pooled corporate Three main categories: ! Credit Default Swaps (CDSs) ! Collateralized Loan Obligations (CLOs) ! Collateralized Bond Obligations (CBOs)
Slide 46: CDS: basic concept
CDS: basic concept Risk Fee / Premium Protection Protection Buyer Seller Contingent Payment on default (losses) The protection buyer transfers, by contract, the risk that the reference entity will default without providing funding
Slide 47: CDSs: A high growth market
CDSs: A high growth market ! Market size of Credit Derivatives: $2,000 billion expected to grow to $4,800 billion by the end of 2004 ! 70% of Credit Default Swaps ! Underlying exposures: Investment grade corporates and financials BBA survey – Credit Derivatives volumes (in $Bn) 4799 1952 1189 893 58
Slide 48: Credit Default Swaps (CDS)
Credit Default Swaps (CDS) Concept A diversified pool of single name default swaps (for example, no more then 2% per name, 8% per industry, all IG, 80% A-rated or better), subject to a first- loss deductible which protects FSA in the event of extreme defaults ! 66 transactions for a total net amount
Slide 49: CDS portfolio
CDS portfolio* ! CDS credit quality remains extremely strong with 99% AA or higher Original Rating** Current Rating** Super AAA Super AAA 83.0% 68.4% AAA 13.4% AAA 12.2% AA AA 17.3% A 4.8% 0.9% Total net par Outstanding: $46.2Bn Total net par Outstanding: $47.2Bn*** ! No loss expected: All CDS can a
Slide 50: "Single Name" CDS portfolio
“Single Name” CDS portfolio ! An exception within the CDS activity: one Single Name Credit Default Swap transaction ! A single diversified pool of 100 investment grade corporate names with $10MM of exposure per name ! Concept was that premium cashflow covered a multiple of prior worst case defaults
Slide 51: Collateralized Loan Obligations (CLO)
Collateralized Loan Obligations (CLO) * ! 74 transactions for a total net amount of $7.7 billion ! Collateral consisting of diversified pools of bank loans to corporations ! Overcollateralization to cover a multiple of expected losses ! Performance triggers ! Legal maturity of approximately 10 years
Slide 52: CLO portfolio
CLO portfolio ! CLO performance has been very strong (no downgrade of more than one category) Original Rating* Current Rating* BBB BBB 4.8% 4.8% A 7.2% A AAA AAA 15.1% 54.0% 53.7% AA 34.0% AA 26.4% Total Net Par Outstanding : $8.0Bn Total Net Par Outstanding : $7.7Bn ! Caused mainly by superior reco
Slide 53: Collateralized Bond Obligations (CBO)
Collateralized Bond Obligations (CBO) * ! 166 transactions for a total net amount of $22.2 billion ! Collateral consisting of diversified pools of senior bonds (primarily speculative grade) ! Overcollateralization to cover a multiple of expected losses ! Performance triggers ! Legal maturity of appr
Slide 54: CBO portfolio
CBO portfolio ! For CBOs, significant credit quality migration (shadow rating) has occurred Original Rating* Current Rating* AAA AAA 44.4% 47.2% BBB 2.2% BB or below 4.9% BBB A 8.4% AA 21.4% A 32.0% AA 13.4% 26.2% Total Net Par Outstanding : $23.7Bn Total Net Par Outstanding : $22.2Bn ! Caused by :
Slide 55: FSA CBO reserves
FSA CBO reserves ! At the end of June, reserves of $51.5MM to take into account expected loss on 7 CBOs ! The original 1992 default curve, that was used to determine reserves taken in June, was based on an assumption of declining default rates similar to the experience after the 1991 peak ! Default
Slide 56: Sensitivity of the CDO portfolio going forward
Sensitivity of the CDO portfolio going forward
Slide 57: Outlook for U.S. speculative grade default rates
Outlook for U. S. speculative grade default rates ! The 2001/2002 peak default rate is similar to the 1991 peak level ! Moody’s U.S. default rate hit 11.1% in 2001 and is expected to decline to approximately 8.4% in 2002 and 7.4% in 2003 ! S&P’s forecast is similar with a 2002 default rate of 8.0% t
Slide 58: Moody's US one-year speculative grade default rates
Moody’s US one-year speculative grade default rates 10% 11% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1970 1971 1972 Source: Moody’s. 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002F 2003F
Slide 59: Are CBO Reserves Sufficient?
Are CBO Reserves Sufficient? ! What would happen if there is a “double dip” in the U.S. economy resulting in a slower than expected decline in U.S. default rates? ! We have created a pessimistic default rate curve by rating category (the “Pessimistic Curve”) that extends the default rate experienced
Slide 60: Example: Default curve for single-B ratings
Example: Default curve for single-B ratings Historical Default Rate 1992 Curve Pessimistic Curve Very Pessimistic Curve 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2001 2002 2003 2004 2005 10-year single-B cumulative default rates ! S&P Worst Cohort:
Slide 61: Impact of the pessimistic curves
Impact of the pessimistic curves Very pessimistic ($ Million) 1992 curve Pessimistic curve curve Net PV Loss 48.9 94.3 153.6 Additional provision needed 0 42.8 102.1 beyond $51.5 already taken Assuming a sustained period of high defaults, CBOs would require an additional $43 - $102MM of loss reserve
Slide 62: New CDS, CLO and CBO underwriting guidelines
New CDS, CLO and CBO underwriting guidelines ! CDSs ! Pooled only (no single-name) ! 1.5x AAA/Aaa requirement ! CLOs ! AAA attachment point ! Experienced, high quality collateral managers ! Tighter structural requirements ! CBOs ! Re-entry under consideration. ! Must be satisfied transaction structu
Slide 63: Asset Management
Asset Management
Slide 64: Principle
Principle Using its established credit and market expertise in the asset-backed and municipal sectors, FSA raises funds at sub-market rates (municipal and structured finance guaranteed investment contracts, or “GICs”) and purchases asset-backed and other high-quality securities, generating attractiv
Slide 65: Guaranteed Investment Contracts (GICs)
Guaranteed Investment Contracts (GICs) ! Combine low cost of funds with investments in high quality, liquid ABS/MBS to earn an attractive Net Interest Margin (NIM) ! Outstanding funding of $1.9Bn* (weighted average life of 5.3 years and -19 bps spread to LIBOR) ! Two primary funding channels ! Munic
Slide 66: GIC Portfolio Management
GIC Portfolio Management ! Current Asset Portfolio ! Outstanding asset balance of $1.9B* (weighted average life of 4.8 years and +60 bps spread to LIBOR) ! AA+ average portfolio credit quality with 96% of investments rated AAA ! U.S. agencies and FSA wrapped ABS/MBS minimize capital charges *As of S
Slide 67: Conclusion
Conclusion ! FSA has a sound business model and is growing rapidly ! FSA is the market leader in the booming U.S municipal bond market ! FSA is the most experienced insurer of asset-backed securities ! CDO risk is manageable and the company has instituted new underwriting standards ! FSA has only be
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