BTIG Equity Research’s new investment report published on June 30th focuses on bond insurer MBIA Inc. (NYSE:MBI). In the report, BTIG analysts Mark Palmer and Giuliano Bologna make the case for their downgrade of MBIA from Buy to Neutral. Their primary concern is the bond insurer‘s significant exposure to the debt of the Puerto Rico Electric Power Authority (PREPA), which is very likely to be restructured sometime in the next few weeks.
The Puerto Rico Public Company Debt Enforcement and Recovery Act
The Puerto Rican government passed the Puerto Rico Public Company Debt Enforcement and Recovery Act on Wednesday of last week. This new law creates a framework through which the Commonwealth’s public corporations can restructure debts
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The legislation was proposed and passed into law in just days as their was some urgency given PREPA’s weakening liquidity. Puerto Rico’s electricity monopoly has been running out of cash, and was struggling to even purchase fuel as of last week. The public corp has met with little success in trying to renegotiate its lines of credit with banks.
MBIA’s exposure to PREPA bond restructuring
According to the BTIG report, MBIA Inc. (NYSE:MBI) has $1.531bn of insured exposure to PREPA’s debt as of March 31st. Palmer and Bologna also note that of MBI’s $4.8 billion of insured exposure to Puerto Rico’s debt, around $2.5 billion is subject to the PR Recovery Act.
As well as its PREPA exposure, as of March 31, MBI also had insured exposure of $973mm in Puerto Rico Highways & Transportation Authority (PRHWT) bonds. The analysts point out that given PRHWT is the biggest debtor of Puerto Rico’s Government Development Bank ($1.7 billion), it is unlikely the Puerto Rican government to restructure PRHWT’s debt. Of note, the GDB is not subject to the Recovery Act and cannot file for bankruptcy.
Stay on the sidelines until the dust clears
Palmer and Bologna advise investors to sit on the sidelines with MBIA Inc. (NYSE:MBI) until the extent of Puerto Rican public company restructuring becomes more clear. They believe that the share price of the firm will be under pressure for some months given the uncertainties of the situation.
However, they note that MBIA Inc. (NYSE:MBI) is on a strong financial footing and that even the worst-case Puerto Rican bond restructuring will not threaten the long-term health of the company. “We believe that any commentary about franchise risk to MBI as a result of the passage of Puerto Rico’s Recovery Act and the potential actions that may follow is misplaced. We note that Standard & Poor’s in October 2014 opined that MBI was sufficiently capitalized to absorb any losses arising from its insured exposure to Puerto Rico’s debt. S&P observed that MBI’s capital position was Dzvery strong with sufficient cushion to absorb higher theoretical losses due to rating migration or actual losses that could be paid through 2015.”