Moody’s: P.R.’s debt woes hit guaranty sector as a whole

Written by  //  December 4, 2015  //  Government  //  No comments

Moody's Investors Service logoThe eventual restructuring of some or all of Puerto Rico’s $73 billion in debt obligations will carry “significant implications” for the financial guaranty sector as a whole, Moody’s Investor Service said Thursday.

“We think a favorable resolution, resulting in only moderate losses for the guarantors, could validate the financial guaranty insurance business model and stimulate demand for bond insurance,” Moody’s said in an analysis.

“An unfavorable outcome, however, could derail the sector’s nascent recovery by highlighting the weaknesses of providing long-term protection on very large exposures for a nominal fee,” the credit ratings agency said, noting its outlook for the financial guarantee insurance sector is negative.

The three groups currently active in the financial guaranty insurance market — Assured Guaranty, Build America Mutual, and MBIA Inc. — face some of the same uncertainties, including “whether the eventual restructuring of Puerto Rico’s debt will vindicate or raise further doubts about the soundness of the financial guaranty insurance business model,” among other issues.

As of the third quarter of 2015, Assured Guaranty and National had approximately $5.1 billion and $4.7 billion, respectively, in net par outstanding to Puerto Rico related issuers. However, after the Government Development Bank made its $354 million debt service payment on its Senior Notes, National’s Puerto Rico related net par outstanding was approximately $4.4 billion.

The next major payment date for the government is on Jan. 1, when $945 million of debt service comes due.

“The fiscal and liquidity stresses impacting the Commonwealth of Puerto Rico have intensified over the past year. While the Commonwealth is unable to file for bankruptcy protection, the financial guaranty insurance sector still faces the prospect of a complex and protracted debt restructuring with the potential for large loss claims,” the ratings agency said.

A potential debt-restructuring scenario down the road presents the potential for large claims payments in coming years, Moody’s said.

“Given the large size of these exposures, the details related to the eventual restructuring of some or all of Puerto Rico’s debt obligations carry significant implications for these firms and for the sector as a whole,” the agency said.

“We think a favorable resolution, resulting in only moderate losses for the guarantors, could validate the financial guaranty insurance business model and stimulate demand for bond insurance,” it added.

“An unfavorable outcome, however, could derail the sector’s nascent recovery by highlighting the weaknesses of providing long-term protection on very large exposures for a nominal fee,” Moody’s said in its assessment.

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