Assured's Puerto Rico Loss Will Be Less Than Feared, BTIG Analysts Say

Assured Guaranty, the biggest municipal bond insurer by par value, is poised to rally in the stock market in part because its losses on Puerto Rico debt may turn out to be less than investors fear, according to analysts at BTIG.

In a report in advance of Assured's fourth-quarter earnings release on Wednesday, analysts Mark Palmer and Giuliano Bologna said Monday that they believe Assured's shares can achieve a fuller valuation relative to adjusted book value in 2015. The stock is trading at about 50% of ABV now, according to the report.

"The fact that Assured Guaranty bought back 10% of its outstanding shares during the first three quarters of 2014 was obscured by concern about the company's insured exposure to Puerto Rico," Palmer said in an email to The Bond Buyer. "We believe Assured has the potential to trade significantly higher this year as the overhang associated with Puerto Rico gets addressed in part and the company's capital return accelerates."

According to the BTIG report, shares in buy-rated Assured have appreciated by almost 32% since mid-October, despite the headwinds caused by uncertainty regarding the company's insured exposure to Puerto Rico's debt as well as persistently low interest rates that have suppressed demand for muni bond insurance.

Assured had $1.006 billion in gross par exposure and $772 million of net par exposure to Puerto Rico Electric Power Authority's debt as of Sept. 30, according to an earlier BTIG report. The uninsured PREPA 2008 Series WW revenue bond 5s of 2028 traded twice on Friday on volume of $140,000 at a low price of 54.51, a high yield of 11.872%, according to the Municipal Securities Rulemaking Board's EMMA website. Also according to EMMA, the insured PREPA power revenue bonds series RR and power revenue refunding bonds series SS 5s of 2028 traded twice on Friday on volume of $20,000 at a low price of 99.502 and a high yield of 5.051.

 "With regard to Puerto Rico, we believe there is a path to a relatively positive resolution of the restructuring of the PREPA that could translate into a better ultimate recovery for Assured than the current price of PREPA bonds would indicate," Palmer and Bologna wrote in the report.

"Perhaps more importantly from a big-picture standpoint, we believe the downside for Assured shares associated with Puerto Rico is less than some investors may believe given that for every $1 billion in losses that the company realizes, the impact on ABV is about $4 per share."

Assured is scheduled to report results on Feb. 25, after market close, with a conference call on Thursday at 8 a.m. eastern standard time. BTIG estimates that Assured will report fourth quarter earnings per share of $0.53 versus the consensus estimate of $0.74, according to the report.

All six analysts tracked by Bloomberg recommend Assured's shares, which were unchanged at $26.39 Monday afternoon. BTIG expects the shares to rise to $39 in 12 months.

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