A specialist insurer that guarantees payments on a bond, lending its rating to the borrower until that rating is itself lost.
A monoline insurer guarantees interest and principal payments on a bond issue, allowing the borrower to raise funds at the insurer's rating rather than its own. The model worked for decades on United States municipal bonds, whose historic default rate is very low, and it rested on a condition rarely spelled out: the guarantee has value only while the guarantor is better rated than the guaranteed, so the monoline cannot afford the slightest downgrade. Extending that model to mortgage securitizations destroyed the condition, exposing triple-A guarantors to a large correlated risk. The crisis produced an instructive chain: downgrades of the guarantors stripped the ratings of thousands of sound municipal issues that had themselves suffered no deterioration. The case remains the clearest illustration of how a risk transfer also moves correlation, and of how a guarantee resting on a rating is a reflexive asset.
The successive downgrades of the United States monolines MBIA and Ambac from January 2008 stripped the triple-A rating from thousands of municipal issues they guaranteed, although the credit quality of those issuers had not changed.
monoline, rehausseur de crédit, financial guaranty insurer, assureur de crédit obligataire