As on March 31, Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc. (NYSE:MBI) had $872 million and $1.531 billion of insured exposure respectively to debts owed by Puerto Rico Electric Power Authority (PREPA), an entity that is eligible to restructure under the Public Corporations Debt Enforcement and Recovery Act (“the Act”) enacted on June 28, 2014.
(Read Valuewalk’s article on Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act here.)
AGO and MBI stocks pressured by losses on exposure to PREPA
The prospect of losses on exposure to PREPA has severely pressured stocks of both Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc. (NYSE:MBI) in recent weeks as seen in their charts below.
The Assured Guaranty Ltd.(NYSE:AGO) stock has lost 8.78% over the past month and 1.61% over the quarter.
Shares of MBIA Inc.(NYSE:MBI) are down 23.87% over the last month and 29.59% over the past year.
Book value per share of Assured Guaranty Ltd. (NYSE:AGO) stood at $28.61 and that of MBIA Inc.(NYSE:MBI) was $19.07 as of yesterday.
Though the Act has been challenged in Puerto Rico’s federal district court by the Franklin and Oppenheimer Funds, BTIG’s Mark Palmer has posted on his blog a useful analysis of its likely impact on Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc.(NYSE:MBI) under different scenarios.
Worst case – Chapter 3 of the Act
In this scenario the restructuring commences under chapter 2 of the Act, fails and thereafter becomes subject to a bankruptcy proceeding under chapter 3 with PREPA declaring insolvency.
The court administered procedure could result in a recovery for Assured Guaranty Ltd.(NYSE:AGO) and MBIA Inc.(NYSE:MBI) of about 35 cents on the dollar.
Somewhat better – the Act fails
It is unlikely that the lawsuit by the Franklin Templeton and Oppenheimer funds would succeed in invalidating the Act.
Palmer observes that in the absence of an actual case being submitted under the Act, the court may dismiss the Funds’ complaint for being simply “an impermissible request for an advisory opinion.”
It is more likely that PREPA would take recourse to restructuring under the Act, and this move would trigger a chain of lawsuits by creditors/insurers challenging, successfully, its constitutional validity.
According to Palmer, PREPA would then land up in a worse financial situation and may not be in a position to pay even for its day-to-day operational costs.
“However, we believe that the removal of the possibility of a debt cram-down would put Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc. (NYSE:MBI) in a better negotiating position, and ultimately could result in a better recovery than the one they would receive under Scenario 1,” says Palmer.
Best case – PREPA goes for Chapter 2, favors bond insurers
PREPA has considerable discretion in picking the debts it chooses to navigate through Chapter 2 which is a consensual, negotiated restructuring.
According to Palmer, “insofar as PREPA wants to preserve the possibility of accessing the capital markets in the future, it may opt to give a better deal to the approximately 30% of its $8.7bn in debt that is insured while moving to impose more severe haircuts on uninsured bondholders.”
This could result in “a more modest haircut” for AGO/MBI and would be received favourably by the stock market, says Palmer, considering the worst had already been discounted.
At the time of writing Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc. (NYSE:MBI) were trading at $23.32 and $9.48 respectively.