BOSTON — The rating boost by Standard & Poor's to AA affirms the ability of Assured Guaranty Municipal Corp. to minimize its Puerto Rico exposure, according to a managing director at the bond insurer.
"What the rating agencies are saying is that Assured should be able to deal with it and not have an overly stressful situation," John Hallacy said Friday in the second and final day of a municipal finance conference co-hosted by Brandeis International Business School and The Bond Buyer.
S&P elevated Assured's rating in March.
Speaking at the Park Plaza Hotel in downtown Boston, Hallacy said: "If you take what has been said publicly, they're going to protect the [general obligation] and COFINA [Puerto Rico Sales Tax Financing Corp.] bonds, and we have a good chunk in that," he said. Assured, he added, has less exposure in PREPA, or Puerto Rico Electric Power Authority bonds, which are on the brink of default.
According to Hallacy, the bond insurance industry's strongest penetration is in A and BBB-rated credits.
"Competition is keen and will continue to be so as National [Public Finance Guarantee Corp.] and others step up their game," he said.
Hallacy said Assured has worked in such distressed cases as the bankruptcies in Detroit; Stockton, Calif.; and Jefferson County, Ala., where the firm wrapped a new financing. "We're pretty involved with doing the best we can for the investor," he said. "We represent bondholders at the table. We have a staff of 350 and it seems like half of them are lawyers."
Adam Stern, director of municipal research at Breckenridge Capital Advisors Inc., noted that defaults, while now low, could experience a marginal uptick when the next recession hits.
"I'm not convinced that the 'willingness to pay' factor is remedied," said Stern, citing the debt-service payment default by village trustees in Lombard, Ill., on $190 million of appropriation bonds issued for a hotel and conference center, and heated debate in Rhode Island over roughly $100 million of moral obligation bonds related to the failed 38 Studios video-game company owned by former Boston Red Sox pitcher Curt Schilling.
Earlier, James Poterba, chief executive of the National Bureau of Economic Research and a Massachusetts Institute of Technology professor, presented a report and said estimates of the revenue gain from eliminating the income tax exemption for interest state and local governments pay are sensitive to assumptions about how taxable investors would adjust their portfolios in response to this change.
"If high-tax-bracket individual taxpayers shun bonds issued by state and local governments when the interest on those bonds is taxable, and if they invest instead in lightly-taxed assets such as low-yield corporate equities, the revenue gain from curtailing the exemption is likely to be substantially smaller than if these investors continue to hold state and local government bonds even after the interest becomes taxable," Poterba said.
The conference featured discussions between academics and finance professionals.