The "monoline model" is where a guarantor, acting as principal investor, provides a credit enhancement to project bonds (or debt) by offering a comprehensive "wrap" against project risks. In effect, the bond rating is enhanced to the level of the guarantor's rating, which was AAA in the case of monoline insurers. The credit crisis has shown the limits of this model, when most credit insurers lost their high credit ratings and left the bond holders with greatly devalued wraps, for which they continue to pay.
Notwithstanding, this concept could be used to design a public or quasi-public credit enhancer. This could be of significant benefit to the PPP market as it could re-open the very deep institutional funding markets to project bonds. There is however a credibility gap to overcome in light of past experiences. To be successful a new monoline-type product would need to be designed in a way likely to respond to the criticisms made of the former monoline model, such as insufficient access to project information by investors and the inherent downgrade risk. Additionally, it would require sponsors with high and secure credit ratings.
A public wrap could apply to capital markets or bank debt, as was the case with the monoline model.
PROS: It is a well tested model, with a proven track record of feasibility, efficiency (tender context included) and competitive pricing. Templates exist for the guarantee, and investor's appetite and reactions are well documented.
It could be easily revived by the public sector, by designing a guarantee instrument similar to the one offered by monolines.
Wrapped bonds allow access to the deepest, and most liquid, plain vanilla, end of the market.
CONS: Wrapped project bonds may cannibalise the garantor's public bond markets.
Investors remain shielded from the project risk and do not develop independent project understanding and appraisal capacities.
The public guarantor would need to ensure the marketing of this product, as investors themselves are likely to remain passive.
Wrapped bank debt only makes sense if it provides ad-ditionality in that it allows banks which would not have participated otherwise to access the market. Otherwise it displaces banks from their core business without adding value.