ESP Offers New Risk Products


Recent demand for risk management products has spawned yet another specialty company.

But this one, called Enhance Structured Products, of parent Enhance Financial Services, is less a new creation than an announcement of a product line, said newly appointed President Paul Palmer.

"We've been doing this for two years," said Palmer. "We created [ESP] for one, to let the market know. And second to assign certain internal responsibilities. The staffing has always been there. We just didn't have the formal name within the organization."

Also appointed to new positions were Constance Begelfer Lambert and Martin Nance, who have both been named senior vice presidents and managing directors of ESP.

Basically, ESP is the result of two years of effort of observing market trends and trying to predict what Enhance's customers were looking for, Palmer said.

"We started by providing a very basic credit product to broker dealers, moved on to providing synthetic capital to exchanges, and then saw a need for applying the skills and technology we've used in those two areas to a much broader product range."

There are other areas where approach es similar to applying credit enhancements to exchanges can be used, Palmer said.

"Think of a firm that's heavily involved in a commodities-based business such as an oil company," he offered. "It's in the business of hedging price risk, and in doing so it assumes significant counter party credit risk from the parties it's hedging with - and those are broker dealers.

"So again, you don't quite have an exchange situation, what you have the same exposure," he said.

Palmer and his team worked on the recent transaction with Mexican bank Banorte S.A., whereupon they helped the company more efficiently raise capital.

"So in Banorte's case, you have a Mexican bank that is seeking financing but is held back by the country's sovereign rating, which is double-B. And what we're doing is helping them pierce the sovereign ceiling, and consequently borrow more cheaply."

In that example, the sovereign rating was lifted by capturing the money offshore. This was done, in a sense, by changing the currency.

Palmer described the migrant workers as an example, as they come into the United States, work, and then send the money back into Mexico.

"So you have predictable flow over time of money going back to Mexico," where the migrant workers deposit regularly into certain banks that they either have a level of confidence in or is located in their home states, Palmer said.

"What we're doing is looking at this flow of cash that is temporarily trapped offshore, in the U.S.," he said. "That's U.S. dollars going back to Mexico, but is, in the moment, in the U.S. So you have a way of at least partially eliminating the Mexican country risk. So you're securitizing these flows. Essentially what you have is these banks borrowing against the future flow of dollars."

Though ESP will continue working on international deals, the company will place equal effort in the domestic arena as well.

"Clearly there is a lot of value to be added to emerging markets deals," Palmer said. "But domestically there are opportunities to add value as well."

Though for legal and competitive reasons Palmer chose not to disclose specific transactions or structures, he did say, "We are absolutely currently working on domestic transactions."