Although the damage of Hurricane Irma nearly doubles the exposure for two bond insurers from where it was after Hurricane Harvey, there is no rating concern for any of the three guarantors, with the impact of Hurricane Maria looming.
S&P Global Ratings issued an update on Wednesday after receiving enough data to conclude that bond insurers cover a total of $26.6 billion in bonds of public finance entities in Florida and Texas counties that Federal Emergency Management Agency has designated as ‘major disaster areas.’
“The additional exposure to Irma-related issues to those from Harvey has not created sector concentration,” the report said. “The $26.6 billion in insured public finance bonds is spread among a variety of sectors ranging from general obligations and other tax-supported bonds to more-specific types, such as health care and transportation.”
According to the data S&P received, Assured has $9.4 billion of gross par exposure to declared FEMA counties from Irma, compared to $7.9 billion from Harvey. BAM has $348 million and $3.6 billion and National at $3.1 billion and $2.2 billion. National is no longer writing new business after receiving a two-notch downgrade to A from S&P a few months ago, though it is responsible for any bonds outstanding that it insures. S&P rates both Assured and BAM at AA.
S&P also stressed that in the immediate aftermath of the storms insurers may be called on to make scheduled debt-service payments, not because of issuers' inability to pay, but because of electronic transfer problems.
The insurers could now turn their eyes toward Hurricane Maria, which has recently made landfall on Puerto Rico and its residents who were still recovering from Irma.
“With regard to Hurricane Maria's impact on Puerto Rico and the insured exposures of Assured Guaranty Ltd. and National Public Finance Guarantee Corp., we already rate these issues 'CCC' or lower,” said the report. “Therefore, there is little question about issuer credit quality or rating migration. In one of our stress scenarios of bond insurers' exposure to issuers in Puerto Rico, we assumed that all issuers defaulted on 100% of their debt service through 2020 and that the insurers were required to make claim payments equal to 100% of debt service.”
Based on that analysis, S&P said that each company's capital position could absorb losses in each scenario and, without accounting for any other factor; there would be no change in Assured's or National's capital adequacy score or financial risk profile.
“We find that each company has sufficient liquid resources to meet claim payments in this scenario--the incremental risk presented by Irma and Harvey does not change our assessment.”
BAM does not have any Puerto Rico-related debt exposure in its insured portfolio.
S&P said that it will continue to monitor the situation, however, both in public finance and structured finance, as details become available and will comment accordingly.
Cumberland Advisors put out a quick note on Hurricane Maria and insured Puerto Rico bonds, while adding that though uninsured Puerto Rico bonds have traded somewhat lower in price, insured Puerto Rico debt has actually traded up in price and down in yield since last week’s Hurricane Irma ripped into the Virgin Islands, also a U.S. commonwealth.
“We don’t know what the aftermath of the hurricanes will be, but there will clearly be Federal help to rebuild the infrastructure of both the Virgin Islands and Puerto Rico,” said John Mousseau, executive vice president & director of fixed income at Cumberland. “To the extent that Federal aid promotes the rebuilding of infrastructure in Puerto Rico, there may be a positive effect on the finances of the major issuers down the road. The bond insurers, who are already paying interest on defaulted Puerto Rico debt, may see some improvement in the fortunes of the issuers and can perhaps resume paying debt sooner, rather than later. That is our best reasoning on the improvement we have seen in insured Puerto Rico bonds over the last week.”