FACTBOX: What is a monoline bond insurer?

NEW YORK (Reuters) - The "AAA" ratings of monoline bond insurers are under threat, sparking fears that an estimated $2.5 trillion in debt insured by the companies is at risk of also being downgraded and potentially sold off.

The following is a list of facts about what how a monoline's business operates.

-Monolines are so named because they operate only one line of business, which is to insure the timely interest and principal payments on bonds. Monolines globally are estimated to insure $2.5 trillion in debt.

-The companies rely on "AAA" ratings, the highest investment grade, for confidence in the quality of their guarantee. The "AAA" rating is transferred to the insured assets as part of the insurance wrap.

-If a borrower fails to make payments the insurer will take over responsibility for the interest and principal payments.

-Bond insurers' "AAA" ratings are under threat because ratings agencies view their capital adequacy as insufficient, based on revised loss forecasts on mortgage-backed debt from risky residential borrowers that is held in the companies' insurance portfolios.

-Monolines only insure investment grade debt and the majority of that is U.S. municipal debt.

-In the U.K. and Europe monolines also wrap debt used to finance hospitals, roads, schools and other public projects, as well as whole business and future flow securitizations.

-Monolines also insure the debt of corporations, sovereigns and mortgage and other asset-backed securities. This is usually done using credit derivatives in structures called collateralized debt obligations (CDOs).

-Insurers are typically paid the full, non-refundable premiums for insuring municipal debt when the insurance is written. These premiums are then recognized on its balance sheet over the life of the policy, due to accounting principles.

-Payments from structured finance deals such as CDOs is normally made in monthly or quarterly installments over the life of the insured obligation.

-In CDOs, monolines insure payments on a portfolio of assets. CDOs insured by monolines typically have a cushion whereby the monoline is not required to pay claims until a certain percent of defaults in the CDO portfolio is reached.

-Monolines hold the insurance contracts to maturity and are not subject to payments due to changes in market value of the securities they insure. They are, however, required to recognize the market value of insurance sold with credit derivatives when they report earnings.

-Most monolines are not required to post collateral against their credit derivatives positions, even if they are downgraded or the securities they insure are downgraded.

(Reporting by Karen Brettell; Editing by Theodore d'Afflisio)