Bond Insurers Prepare for the Worst in Puerto Rico

Three major bond insurers are bracing for the possibility of a historic payout if Puerto Rico defaults on debt due Friday.
Puerto Rico Gov. Alejandro Garcia Padilla Thursday reiterated statements that the commonwealth cannot afford to make the payment and cited an April law that allows Puerto Rico to temporarily stop paying bond debt. Mr. Garcia Padilla has long said that the island would not be able cover the July 1 payment of nearly $2 billion.
That could trigger as much as hundreds of millions in payments from insurers Ambac Financial Group, National Public Finance Guarantee Corp. and Assured Guaranty Ltd. to cover principal and interest, in what would be the biggest insurer payout to date in Puerto Rico.
It isn’t yet known how likely this worst-case scenario is since it is unclear just how much the insurers will have to pay. In some cases, the reserve funds set aside by Puerto Rico could cover payments.
Analysts said the ultimate impact will be limited because all three insurers have money set aside for such claims and their share prices have already suffered because of Puerto Rico’s troubles. Insurers also agree to pay only the amount due on the day it is due, not to accelerate payment on the defaulted bonds.
“There will be some instances of nonpayment but for the bond insurers it’s not going to be a catastrophe,” said Edwin Groshans, an analyst at Height Securities.
President Barack Obama signed new debt restructuring legislation for Puerto Rico Thursday but that won’t do anything to avoid a default. Instead the law would provide the island with a stay against creditor litigation.
The passage of restructuring legislation “is a positive for bondholders and insurers in the sense that it takes the potential for chaos off the table,” said Mark Palmer, financials analyst at BTIG, a broker-dealer.
But there are also risks for those creditors in that legislation, which authorizes the creation of a federally appointed oversight board in Puerto Rico, said Josh Esterov, senior insurance analyst at the research firm CreditSights.
“The oversight board is likely to weigh the concerns of citizens against [those of] bondholders,” he said, “and I would find it surprising if the oversight board were to weigh the concerns of the bondholders more heavily.”
One of the biggest potential Puerto Rico payouts could come from Assured Guaranty, according to company documents. That company hasn’t disclosed its exposures on a month-by-month basis, but the documents show Assured backs $428 million in payments coming due in the third quarter of 2016. Analysts believe as much as $362 million of that could be at risk of nonpayment.
Ambac could be on the hook for another $122 million, according to company disclosures. Some analysts believe all of the July 1 debt payments backed by Ambac could be at risk of default. Ambac reported at the end of the first quarter of 2016 that it has $8.9 billion to pay out claims. Earlier this year it paid $10.3 million to cover a default on Puerto Rico’s Infrastructure Financing Authority debt.
National Public Finance Guarantee Corp. has disclosed that it backed $173 million in general obligation bond payments coming due Friday, debt Puerto Rico’s governor has said the commonwealth won’t pay. Another $172 million in National-backed debt comes due either Friday or later in 2016, according to disclosures posted on the company’s website, and analysts believe about $27 million of that is at risk of default.
National, a unit of MBIA Inc., reported at the end of the first quarter of 2016 that it has $4.7 billion to pay claims.
Write to Heather Gillers at heather.gillers@wsj.com
By HEATHER GILLERS

Governor says island commonwealth won’t be able to cover nearly $2 billion in looming bond payments

Bond Insurers Prepare for the Worst in Puerto Rico

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