Credit Enhancement: A Clash of Cultures

Robert D. AicherKenneth R. Wylie

© Sidley Austin Brown & Wood LLP 2002

“Gentlemen, [said the banker, M. Danglars] … a most ridiculous circumstance has occurred … Thomas and French,

the bankers at Rome, have sent to me a certain individual calling himself the Count of Monte Cristo who is desirous of

opening an account with me to any amount he pleases …” (Alexandre Dumas, The Count of Monte Cristo, page 469, Collins (London and Glasgow) 1884, (latest reprint 1968)

(originally published in France in 1844).

“See here … [ says the Count] are two similar letters to that you yourself received; the one from the house of Arstein and Eskeles of Vienna to Baron de Rothschild, the other drawn from Baring of London to M. Laffitle. Now sir, you have but to say the word and I will spare you all uneasiness and alarm on the subject, by presenting my Letter of Credit at one or the other of the establishments I have named.” (Alexandre Dumas, The Count of Monte Cristo, page 473, Collins (London and Glasgow) 1884, (latest reprint 1968) (originally published in France in 1844).

Letters of CreditBank

Letter of Credit

BeneficiaryUnderlying Transaction

Customer

Reimbursement Agreement

Financial Guarantee Insurance Policy

Insurer

Financial Guaranty Insurance Policy

Beneficiary

Insurance and

IndemnityAgreement

(optional)

Issuer/Counterparty Underlying Transaction(typically Municipal Bonds, Debt or Derivative

Transactions)

Traditional Insurance(Bilateral)

Policy

Insured Insurer

Premiums

Traditional Defenses to Payment

• Fraud (including fraudulent misrepresentation, fraud in the inducement, and fraudulent non-disclosure)

• Misrepresentations (innocent and negligent)

• Breach of conditions in policy(and breach of proof of loss warranty)

• Inadequate notice

• Loss caused by or due to the fault of the insured

• Loss not within coverage of risk assumed

• Policy not in effect because not issued/expired/cancelled

• No insurable interest

• Excessive claim

Surety BondSurety

Surety Bond

Obligee

Reimbursement Agreement

ObligorUnderlying Transaction

(typically a Construction Contract)

CommonaltiesBank/Insurer/Surety

- Letter of Credit- Financial Guarantee Insurance Policy- Surety Bond

- Beneficiary- Obligee

-Reimbursement Agreement- Insurance and Indemnity Agreement

-Customer-Issuer/Counterparty-Obligor Underlying Transaction

Hollywood Funding

Movie

CompaniesFlashpoint

Institutional

Investors

HIH,

Insurer 1-3

Reinsurers

AIG,

Insurer 4-6

Hollywood Funding

Nos. 1-6

Forward Sale Contracts (of future oil

and gas deliveries)

Chase Mahonia Limited

11 Sureties

$ Prepay price of oil and gas

ENRONNorth America

Insure payment of loan if default in deliveries

Mahonia

Loan

ENRON CORP. Same Directorand

Shareholders

Sell same quantities of gas on same dates as per Mahonia forward

contracts

Buy Gas/Oilover future

dates

Guaranty of delivery obligations to Mahonia

Forward Sale Contracts (of future oil

and gas deliveries)

StonevilleAegeanLimited

Mahonia Limited

11 Sureties

Chase

$ Prepay price of oil and gas

ENRONNorth America

Insure payment of loan f default in deliveries

Loan

$ $

$

Credit Enhancement: A Clash of Cultures

Robert D. AicherKenneth R. Wylie

© Sidley Austin Brown & Wood LLP 2002

Table 1 Insurers With Financial Enhancement

RatingsCompany Financial Enhancement Ratings as of April 23, 2002

ACA Financial Guaranty Corp. A

ACE Capital Re InternationalLtd. AA

ACE Capital Re Oversees Ltd. AA

Ace Guaranty Re Inc. AAA

Allianz Risk Transfer AA

Ambac Assurance Corp. AAA

Ambac Assurance U.K. Ltd. AAA

Axa Re Finance S.A. AAA

CDC IXIS Financial Guaranty AAA

CDC IXIS Financial Guaranty Europe AAA

Centre Insurance International Co. AA–

Centre Solutions (Asia) Ltd. AA–

Centre Solutions (Bermuda) Ltd. AA–A AAA AAAAA

Table 1 Insurers With Financial Enhancement

RatingsCompany Financial Enhancement Ratings as of April 23, 2002

Centre Solutions (U.S.) Ltd. AA–

Financial Guaranty Insurance Co. AAA

Financial Security Assurance (U.K.) Ltd. AAA

Financial Security Assurance Inc. AAA

Financial Security Assurance Intl. Ltd. AAA

FSA Insurance Co. AAA

MBIA Assurance S.A. AAA

MBIA Assurance Corp. AAA

Radian Asset Assurance Inc. AA

Radian Reinsurance Inc. AAA

RAM Reinsurance Co. Ltd. AAA

XL Capital Assurance Inc. AAA

XL Financial Assurance Ltd. AAA

Yasuda Kasai Financial Guarnatee Insurance Co. Ltd. AAA

ZC Specialty Insurance Co. AA–

Credit Enhancement: A Clash of Cultures

Robert D. AicherKenneth R. Wylie

© Sidley Austin Brown & Wood LLP 2002