Moody's Investors Service's move to review Puerto Rico's Baa3-rated general obligation bonds for a downgrade is a credit negative for bond insurers Assured Guaranty and MBIA's National Public Finance Guarantee.
Assured has approximately $4.1 billion of total combined net par exposure to the bonds that Moody's has placed on review for downgrade, the rating agency said in a report Monday. National's exposure to the same bonds is approximately $2.7 billion in total gross par.
The possibility of a cut in Puerto Rico's GO rating to below investment grade status would be "material" to the insurers given their current levels of capitalization, Moody's said. A downgrade on Puerto Rico's GOs would increase the ratio of below-investment-grade exposures to capital and hinder efforts made by insurers to build a capital base.
Moody's placed $52 billion of Puerto Rico debt on review for a rating downgrade Dec. 11 to assess the commonwealth's weakening liquidity and reliance on external short-term debt amid a sluggish economy. The move has pressured the island to sell bonds to prove that it can access capital.
"These financial guarantors have significant exposure to Puerto Rico's debt issuing entities in the aggregate," James Eck, vice president and senior credit officer at Moody's, said in the report. "Given the various linkages of these obligors and their reliance on the same local economy to support revenues, we view the guarantors' exposures to Puerto Rico to be more highly correlated than is typical across public sector obligors."
Total net par outstanding exposure to Puerto Rico bonds by Assured, National, Ambac Assurance Corp., Syncora Guarantee and Financial Guarantee Insurance Corp. was almost $16 billion by June 30, according to an analysis by The Bond Buyer.
The financial guarantors have wrapped a wide spectrum of Puerto Rico debt, from commonwealth general obligations to below investment-grade aqueduct and sewer bonds. Exposure to any below-investment grade bonds necessitates more capital on hand from an insurer.
Assured's exposure to $2.17 billion of commonwealth GOs is the eighth biggest U.S exposure in the company's portfolio. They are the worst-rated credit among Assured's 50 largest U.S. public finance exposures.
"Assured Guaranty believes, and Moody's has also acknowledged, that recent measures announced by the new Governor of Puerto Rico and his administration in adopting its fiscal 2014 budget in June reflect a strong commitment to improve the financial stability of the Commonwealth and several of its key authorities," Assured said in an emailed statement.
National echoed those sentiments in August, telling The Bond Buyer that Governor Padilla's efforts to improve Puerto Rico's financial condition were encouraging.
In October, Standard & Poor's said legacy bond insurers have enough of a capital cushion in their adequacy ratios to absorb high theoretical losses that could come with a rating migration. The rating agency also added that it didn't expect any rating actions.