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Insurers Cushioned for PR Downgrade: S&P

JAN 29, 2014 12:01pm ET
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Assured Guaranty and National Public Finance Guarantee are prepared to withstand a potential downgrade of Puerto Rico bonds to junk status, according to Standard & Poor's.

"The companies have sufficient capital cushions to absorb higher theoretical losses from negative rating actions on Puerto Rico, while maintaining sufficient liquidity to pay possible losses through 2015," S&P said in a note Wednesday.

On Friday, S&P placed Puerto Rico's general obligation debt on rating watch negative, following similar actions by Moody's Investors Service and Fitch Ratings.

The ratings services, which cut the U.S. territory to the lowest investment grade in 2012, raised concern over Puerto Rico's ability to access the capital markets after yields soared last year. Puerto Rico has about $70 billion of public sector debt outstanding. About 2/3rds of mutual funds hold the debt, which offers triple tax exempt status.

Total net par outstanding exposure to Puerto Rico bonds by Assured, MBIA's National, Ambac Assurance Corp., Syncora Guarantee and Financial Guarantee Insurance Corp. was $15.7 billion, according to an analysis by the Bond Buyer. Insurers are backing everything from commonwealth general obligations to aqueduct and sewer bonds.

"The higher level of municipal refundings in bond insurers' insured portfolios has led to accelerated growth of their capital and generally stronger capital adequacy," S&P analysts said. "Although credit stress in the bond insurers' public finance exposure pressures capital adequacy, we believe the overall acceleration of capital generation will offset potential credit deterioration."

The authors of the report, Marc Cohen and David Veno, said the insurer's ability to handle a Puerto Rico downgrade assumes that the companies will continue to experience refundings and limited new business production to replace run-off risk.

Rising interest rates will cut refunding issuance by 11% to $98.6 billion in 2014, according to a Bond Buyer survey of underwriters. New issuance is expected to climb 22% to $195 billion.

Bond insurers wrapped wrapped $12.08 billion of debt in 2013, or 3.9% of the total $311.9 billion in long-term muni bond sales, according to data from Thomson Reuters.

"We are pleased that S&P continues to publicly recognize our ability to manage our Puerto Rico and Detroit exposures," Assured said in an emailed statement. S&P projects that Assured’s capital grew by 3% while total insured par decreased by 10% during 2013, according to the report.

S&P's note iterates analysis made in an October 2013 report that said Assured and NPFG would be braced by their strong capital positions and lengthy payment schedules of bonds in the event of a default.

"In addition, although the Puerto Rico and Detroit exposures may be large relative to current statutory capital, any claim payments resulting from actual losses are made over time based on the payment schedule of the underlying issue with no acceleration," Standard & Poor's said Wednesday.

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Comments (2)
Is ambac still alive?
Posted by Scott B | Wednesday, January 29 2014 at 4:20PM ET
How do you define 'alive'?
Posted by Oliver R | Wednesday, January 29 2014 at 5:35PM ET
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