IDB BUSINESS SEMINAR

1
IDB BUSINESS SEMINAR

• Capital Markets for Development -
• Role of the Private Sector
• June 3, 2003
• Securitization and Structured Transactions in
  Local Capital Markets in the Region Views from
  the Monolines
• Ms. Betty J. Starkey
• Managing Director
• XL Capital Assurance, Inc.
• 1221 Avenue of the Americas
• New York, NY 10020-1001

2
The Financial Guarantee Insurance Model

• Financial guarantee industry established in 1972
  to offer credit enhancement to the municipal bond
  market in the United States
• Today, this financial product dominates the
  U.S.municipal bond market
• The industrys fundamental expectation is that
  only minimal net losses will occur in a normal
  operating environment
• Insurers only take on liabilities judged to have
  minimal loss potential, except under extreme
  economic conditions
• Insurers premium rate on transactions is
  generally a portion of the difference in cost of
  issuing an uninsured BBB- or better transaction
  versus that of an insured AAA transaction the
  remaining portion constitutes savings for the
  debt issuer

3
The Financial Guarantee Insurance Product

• Unconditional and irrevocable guarantee of
  scheduled payments of principal and interest
• Credit enhancement of bond issues to AAA rating
• Backed by extensive resources devoted to
  zero-loss underwriting and proactive credit
  remediation
• Credit based underwriting as opposed to actuarial
  underwriting

4
What Benefits Do We Offer?

• Benefits to Issuers
• Lower cost of funds
• Easier, stable access to capital markets
• Broader investor participation
• Single point of contact for documentation issues
• Benefits to Investors
• Credit Protection - Sleep Insurance
• Liquidity
• Price Stability - Retention of value in crisis
• Proactive credit surveillance
• Benefits to Emerging Markets
• Easier Access to capital markets
• Faster pace of infrastructure development
• Huge savings potential

5
XLCA Business Lines

• Asset-Backed Structured Finance
• Commercial Structured Finance --corporate
  receivables, etc.
• Consumer Structured Finance -- mortgages, credit
  cards, etc.
• Collateralized Debt Obligations pools of
  corporate bonds, loans,etc
• Structured Single Risk
• Municipal, provincial, sovereign, and
  sub-sovereign finance -- US and overseas
• International Project Finance -- essential
  infrastructure
• Future Flows -- oil exports, bank cash flows,
  commodities

6
Conservative Underwriting

• Underwrite to zero-loss standard
• Each transaction in the portfolio is required to
  have a rating of investment grade or better
• Insured portfolio currently has a weighted
  average rating of AA-
• Detailed and comprehensive underwriting policies
  and guidelines
• Staffed with experienced financial guarantee and
  credit professionals

7
XLCAs Activities and Interest in Latin America

• Experienced Latin American team has
• Conducted extensive due diligence in the region
  beginning in 1996
• Introduced financial guarantees to the region in
  1997 while at another guarantor
• Moved to XL seeking to expand participation in
  the region from a corporate platform with greater
  structural flexibility than the mature monoline
  industry
• Closed 17 financial guarantee transactions in
  Latin America since 1999 (in Mexico, Chile,
  Brazil, Costa Rica, El Salvador, Panamá, and
  Jamaica)
• Current Exposure and Future Plans
• XL financial guarantee Gross Par Exposure in
  Latin America
• US3.3 Billion O/S as of 12/31/02
• Continuing to explore participation in future
  flow, asset-backed and project finance
  transactions in various countries throughout the
  region

8
XLCAs Activities and Interest in Latin America

• XLCAs ability as a AAA monoline guarantor to
  participate in non-investment grade countries is
  currently limited to the following structures
• Future flow transactions
• Local capital market projects in countries with
  local currency investment grade ratings
• Deals incorporating IDB A/B loan structures
• Projects enhanced by Political Risk Insurance
  (PRI) coverage

9
Why We Prefer the Local Currency Option

• Eliminates exchange rate, transfer and
  convertibility risks.
• Prevents any risk of a currency mismatch.
• Local currency financing matches revenues and
  debt service obligations.
• Fulfills the public policy goal of recycling
  local pension fund investments into a countrys
  productive infrastructure.
• Attracts greater private investor interest by
  reducing overall credit risk profile and securing
  higher ratings.

10
Lessons Learned from Our Local Currency Deals in
Chile

• XL closed two toll road transactions involving
  sections of the PanAmerican highway south of
  Santiago (Collipulli-Temuco and
  Chillan-Collipulli)
• The financings entailed 20-year fixed rate bonds
  denominated in Unidades de Fomentos (UFs) an
  inflation-adjusted unit of account used in Chile
• Bond issues assigned AAA local ratings with XL
  guarantee
• Bonds were sold exclusively to local private
  investors, including local pension funds and
  other institutional investors
• Issues were oversubscribed

11
Lessons Learned from Our Local Currency Deals in
Chile

• Lessons Learned
• First, Chiles favorable economic and public
  policy environment provided a positive context
  for our credit decision to undertake the
  projects.
• Second, financing costs, via 20-year fixed rate
  bonds, were lower than what they would have been
  in the international markets (no exchange rate
  risk or currency mismatch).
• Finally, our financial guarantee, combined with
  the Chilean governments prudent national rating
  standard requirement, made the transactions
  relatively safe and attractive investments for
  local private investors.

12
Collaborating With the IDB

• XLCA views a partnership with the IDB as the
  appropriate strategy to promote the applicability
  of financial guarantee in the Latin American
  region.
• We believe our objective is consistent with the
  IDBs policy objectives as we understand them.
• A partnership with the IDB would greatly enhance
  our ability to conduct business in the region

13
CONCLUSION What Is The Long-Term Potential of
Bond Insurance in the Latin American Context?

• Promotes fulfillment of development policy
  objectives - e.g., development of local capital
  markets
• Promotes issuance of long-term, highly-rated
  local currency instruments
• Long-term instruments satisfy needs of pension
  funds and other local institutions, and allow for
  recycling of local savings to local development
  efforts
• Avoids the FX risk inherent in seeking financing
  in foreign capital markets (such as U.S. Yankee
  bonds)
• Adds depth and liquidity to local capital markets
• Local banks can take leading role in underwriting
  and structuring insured bonds
• Promotes development of local credit rating
  agencies