Recent Court Ruling Good News For Puerto Rico Bond Insurers: BTIG

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A February 9th report from BTIG Equity Research updates the Puerto Rico Electric Power case in light of a recent U.S. District Court ruling. The ruling by Judge Francisco A. Besosa strikes down Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act as it conflicted with the U.S. Bankruptcy Code and was unconstitutional.

BTIG analysts Mark Palmer and Giuliano Bologna discuss the implications of the court ruling in the introduction of their report. “We believe the decision was a significant positive for Buy-rated bond insurers Assured Guaranty (AGO – $39 PT) and MBIA (MBI – $12 PT) insofar as they stand to fare better in negotiations with the Puerto Rico Electric Power Authority (PREPA) now that the threat of sizeable court-imposed haircuts under the Recovery Act’s Chapter 3 has been removed. While Neutral-rated Ambac Financial Group (AMBC) does not have insured exposure to PREPA’s debt like AGO and MBI, it has insured exposure to other public corporations covered by the Recovery Act and is therefore also a beneficiary of the invalidation of the law.”

Of note, PREPA has issued $8.3 billion in bonds and has another $673 million in bank loans. The utility is under court order to submit a turnaround plan by March, when its forbearance deal with bondholders expires, but it is widely anticipated that PREPA will request an extension until at least June 1st.

More on Assured Guaranty’s Puerto Rico exposure

Palmer and Bologna note that AGO had $1.006 billion in gross par exposure and $772 million of net par exposure to PREPA’s debt as of September, while MBIA had $1.422 billion of gross par exposure. Although the ruling against the Recovery Act eliminated this any bankruptcy-like process, PREPA could still default on its debt. History shows, however, that “AGO and MBI have fared better than had been originally feared when municipalities whose debt they insured have defaulted due to their ability to negotiate terms favorable to their interests.”

The analysts argue the ruling improves bond insurers’ prospects for larger recoveries on their PREPA exposures than most anticipate.

The report notes that aside from its insured exposure to PREPA’s debt, AGO also has $1.675 billion in net insured exposure to other Puerto Rico public corporations subject to the Recovery Act including net insured exposures to the Puerto Rico Highway and Transportation Authority ($1.117 billion), the Puerto Rico Aqueduct and Sewer Authority ($384 million) and the Puerto Rico Convention Center District Authority ($174 million).

Moreover, the invalidation of the Recovery Act will certainly reduce the potential downside AGO faces within the group.

More on MBIA and Ambac’s Puerto Rico exposure

Finally, the BTIG report notes that MBI also has $919 million of gross insured exposure to the Puerto Rico Highway and Transportation Authority as of September 30. AMBC had $849.2 million of net insured exposure to public corporations covered by the Recovery Act, including $712.1 million of exposure to the Puerto Rico Highway and Transportation Authority and $137.1 million of exposure to the Puerto Rico Convention Center District Authority.

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