4.2.1. Another avenue for exploration is the revival of the monoline model. It should be remembered that, like other kinds of financial institutions, the monolines have suffered differing degrees of portfolio distress. Although some of the monolines are severely impaired and will probably not survive, some retain double-A ratings, well in excess of the stand-alone ratings of typical PPP debt (see table p 15). In principle, therefore, there is potentially value in those guarantees.
4.2.2. Certainly, investors' recent experience with the monolines will be difficult to overcome, but there are ways to take advantage of the monoline guarantee while mitigating the risk of monoline failure. The clearest of these is for the monoline to receive its fee over time and impose a downgrade trigger on the monoline such that if its rating falls below an agreed level, the investor has the option to give up the guarantee and receive the guarantee fee from the issuer. (Historically, the monoline has received its fee wholly or partially in advance, which would make this arrangement impossible without exposing the issuer to the risk of the monoline). The advantage of this would be to re-direct yield from the monoline to the bondholder when the rating of the bond falls, which would help to maintain the risk-adjusted return and, therefore, the trading value of the affected bond.
4.2.3. Despite their recent troubles, some of the monolines have retained staff experts in project structuring as well as project monitoring capability. The idea of harnessing these skills to the benefit of bond investors, even without a full guarantee, has been mooted. The essential idea is for the monoline to guarantee enough of the senior debt to retain an economic interest in project outcomes, but not the entirety of the debt because investors do not necessarily value the traditional guarantee. This would give investors confidence that the work carried out by the monoline both before and after financial close was of the high standard expected of a principal in the transaction without investors having to pay for the entirety of the debt to be guaranteed.
Mechanically, the wrapped and unwrapped debt could be issued as separately traded tranches to appeal to investors with differing views on the value of the guarantee. In this arrangement, the unguaranteed in-vestors would receive the benefit of the monoline's structuring and due diligence without giving up yield. Alternatively, the wrapped and unwrapped bonds could be stapled to produce a single economic unit that was partially guaranteed. Lender controls would sit with the monoline for the guaranteed bonds. This model would help address investors' lack of project expertise and the problem of deal management post-closing. It would not address the rating problem, nor would it help with asset classification and performance bench-mark difficulties.
4.2.4. Another possibility is to have a monoline take a first-loss rather than pari passu position vís-à-vís senior debt. The first-loss position could either be in the form of a guarantee or a funded position depending on investors' preferences. The principle behind this arrangement is that the expected loss on to the senior debt in a typical PPP is considerably less than the entire senior debt amount; therefore, having a party contractually obligated to absorb the first losses that occur to the senior debt would improve the loss severity experienced by senior creditors should a default occur, which should make the debt more attrac-tive to investors. This differs from the historical monoline arrangement in which all of the senior debt is guaranteed and therefore bears a rating that is the higher of that of the underlying project and the mono-line. Unless the first loss position were structured as a separate tranche of debt, this arrangement would not change the probability of default (but only the "loss given default") on the senior debt, and therefore would not be likely to have an effect on the rating of the senior debt, so the appetite for investors for this kind of protection needs to be assessed.