Puerto Rico Crisis Seen Muddying MBIA’s Bond-Insurance Comeback

{Jenniffer González condena el “IVU con esteroides” – El IVA es precursor a Declaración de Separación Anti-USA Chavista
https://estado51prusa.com/?p=53923 – q AGaPito no comienza rebajando los Amigos del Alma? Consulados? Batateo? Malgastos? – Pq No Explica cómo usó los $3-4 Billones recaudados de los AGaPo-Taxes? – El padre de AGP dicen era Bolitero con Mentalidad de Jugador Empedernido q al perder dobla la apuesta – Agrio recibimiento – Demostración «Oficial» Tipo Auto-Golpe Chavista se le Vuelve Violenta – Show de AGP  https://estado51prusa.com/?p=53870 AGP “No Hay Déficit” – Febrero 24, 2015  –  https://youtu.be/Yg3IiRLyc1s }

Puerto Rico Crisis Seen Muddying MBIA’s Bond-Insurance Comeback

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by Brian Chappatta  7:30 PM EDT   May 14, 2015
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Jay Brown, Chief Executive Officer of MBIA Inc. Photographer: Jonathan Fickies/Bloomberg

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Is The World’s Love of U.S. Corporate Debt a Problem?
The risk of losses tied to Puerto Rico is clouding MBIA Inc.’s comeback in the resurgent business of guaranteeing state and municipal debt.
After years of healing from the financial crisis that wiped out insurers’ AAA ratings, MBIA’s National Public Finance Guarantee Corp. has been starting to win new business. National backed two deals in 2014 and eight more this year, mounting a challenge to Assured Guaranty Ltd., the biggest guarantor in the $3.6 trillion municipal market.
A worse-than-expected outcome in the Caribbean commonwealth could derail MBIA Chief Executive Officer Jay Brown’s progress. The bond insurer has almost double Assured’s exposure to Puerto Rico’s troubled power authority — known as Prepa — which is on the brink of an unprecedented $9 billion municipal restructuring. The cost of debt insurance on MBIA has been climbing relative to Assured, and researcher CreditSights Inc. cut its recommendation this week on MBIA’s obligations to “underperform.”
‘Severe Scenarios’
“Assured Guaranty is a company that can withstand some pretty severe Puerto Rico outcomes without discussions of whether it can still pay dividends up to the holding company,” said Josh Esterov, an insurance analyst at CreditSights in New York. “That question becomes murkier for National in some of the more severe scenarios.”
Assuming an immediate default on all Puerto Rico bonds, a recovery rate of 50 percent would just about wipe out all of National’s statutory capital, according to the CreditSights report from May 13. Such a loss would require 40 percent of Assured’s funds.
CreditSights maintained its “outperform” recommendation on Assured in a May 10 report.
National and Assured will be able to absorb losses from Puerto Rico, said Mark Palmer, an analyst at BTIG LLC in New York. For National, however, the cost will become clearer sooner, he said.
“MBIA is more levered to the outcome at Prepa,” he said. “July 1 is a very important date for Prepa because that’s when the next meaningful maturity occurs.”
Kevin Brown, a spokesman at Armonk, New York-based MBIA, declined to comment on the CreditSights recommendation. CreditSights previously ranked the company “outperform.”
Rating Increase
Standard & Poor’s raised National’s financial strength rating in March 2014 to AA-, the fourth-highest rank, giving the insurer an opening to back debt from weaker localities. The rating is one step lower than Assured’s municipal-insurance units and competitor Build America Mutual Assurance Co.
S&P analyst David Veno estimated in a July 2014 report that National could withstand $450 million of losses from Puerto Rico beyond the credit rater’s expectations before its grade would be at risk. That figure is probably higher now, he said in a telephone interview Thursday.
By comparison, Veno’s report predicted Assured had a capital cushion of about $1.55 billion.
MBIA shares climbed 4.9 percent to $9.94 at 2 p.m. in New York, the biggest jump since March. Assured stock rose 2.1 percent to $28.73. Puerto Rico’s governor and lawmakers reached an agreement late Thursday on a plan to raise the sales tax on the island, which may help it sell debt and ease a cash crunch.
Of National’s $4.54 billion in Puerto Rico exposure, the largest portion of gross par outstanding rests with Prepa, which municipal analysts expect to be the first of the island’s agencies to restructure its obligations. The insurer backed $1.42 billion of the utility’s debt through March 31, compared with $773 million for Assured, company filings show.
Prepa Deadline
As Prepa gets closer to a creditor-imposed deadline in June to restructure and a $416 million bond payment on July 1, the cost is increasing to own insurance on MBIA’s obligations.
Credit-default swaps tied to MBIA have widened to 520 basis points from 489 basis points at the start of 2015, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
The cost of protection is 200 basis points more than swaps tied to Assured, up from 107.5 basis points in December, the data show.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“In the insured portfolio, the uncertainty over Puerto Rico commands a lot of attention,” MBIA Co-President Bill Fallon said in a May 12 call to discuss first-quarter results with analysts and investors. Prepa “is the immediate focus,” he said.
Puerto Rico Debt New York Caribbean Bonds Sales Tax

Puerto Rico Governor, Lawmakers Agree on Revenue Proposal

by Michelle KaskeEzra Fieser  11:25 PM EDT   May 14, 2015

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Puerto Rico Governor Alejandro Garcia Padilla and lawmakers reached an agreement on a proposal to raise the island’s sales tax, a move that may help it sell debt and ease a cash crunch.
The plan would boost the levy to 11.5 percent from 7 percent for nine months, in a transition to implementing a value-added tax, the governor and members of his Popular Democratic Party told reporters late Thursday in San Juan. The increase is expected to bring in $1.2 billion of revenue. Lawmakers also agreed to recommend $500 million in spending cuts as part of a $9.8 billion budget for fiscal 2016.
The governor and legislators gathered Thursday to draw up the plan, which the island’s House of Representatives and Senate must vote on. The chamber rejected a tax-overhaul proposal from the governor April 30. Following that vote, Garcia Padilla warned that the government would have to cut spending by as much as $1.5 billion without new revenue.
“May 14 will go down in history as the day that Puerto Rico began implementing a responsible budget,” Senate President Eduardo Bhatia told reporters.
The House’s next scheduled session is on Monday.
Bonds Rise
Puerto Rico general obligations maturing July 2035 rose in price following news of the agreement. The bonds changed hands Friday at an average 79.4 cents on the dollar, up from 79.3 cents the day before, according to data compiled by Bloomberg. The yield was 10.5 percent. The securities were the most actively traded in the municipal-bond market.
Junk-rated Puerto Rico faces a $191 million deficit in this year’s spending plan, and the legislature must approve a fiscal 2016 budget by June 30. A planned sale of $2.9 billion of bonds backed by oil taxes hinges on achieving a balanced budget, a five-year financial framework and new revenue measures, the Government Development Bank has said.
The commonwealth and its agencies have $72 billion of debt. Speculation the territory will struggle to repay it all on time and in full has pushed up yields on Puerto Rico obligations.
The oil-tax bond deal would repay loans that the highway authority owes to the Government Development Bank, which lends to the commonwealth and its localities. The bank had $1.1 billion of net liquidity as of March 31, down from $2 billion in October. It may run out of cash by Sept. 30 if Puerto Rico is unable to sell the oil-tax bonds, according to a quarterly filing.
A sales-tax boost would be a temporary alternative to the governor’s proposal for a value-added tax applied at each level of production and distribution.
A consensus on a tax revamp “gets them some liquidity and buys them more time,” Lyle Fitterer, who helps oversee $34 billion of munis at Wells Capital Management in Menomonee Falls, Wisconsin, said before officials announced the agreement.
For more, read this QuickTake: Puerto Rico’s Slide

Puerto Rico Balanced Budget Bonds Debt Oil Sales Tax San Juan Development Bank House of Representatives Bond Market

The Situation

Like a consumer using one credit card to pay off another, Puerto Rico is seeking to issue $2.9 billion of bonds in 2015. That’s to repay $2.2 billion that the commonwealth’s highway authority borrowed from a government bank. In March, 2014, after Standard & Poor’s and Moody’s Investors Service lowered the ratings on Puerto Rico’s bonds to below investment grade, Puerto Rico issued $3.5 billion of general obligation bonds, the largest speculative offer in the $3.6 trillion municipal bond market. The idea was to balance the budget, refinance debt and buy time to revive a shrinking economy. Moody’s cut its rating some more in July. As Puerto Rico’s credit erodes, its investor base has changed. Instead of the mom and pop investors in municipal bond mutual funds, Puerto Rico is now turning to hedge funds, distressed-debt firms and corporate high-yield funds to lend it money. Still, because of a quirk in the tax laws, Puerto Rico’s plight affects most people with a mutual fund invested in the municipal bond market. Unlike the bonds of most states and municipalities, Puerto Rico’s are exempt from local, state and federal taxes everywhere in the U.S. As a result they are held by 52 percent of open-end muni funds, according to Morningstar Inc. The competitive advantage made it easy for Puerto Rico to double its debt in 10 years by selling bonds to plug annual budget deficits and pay for operating expenses — the combination that brought New York City to the brink of bankruptcy in the 1970s.

The Background

Wall Street smoothed Puerto Rico’s path to fiscal debacle. After the commonwealth adopted a sales tax in 2006, investment banks worked with officials in San Juan to create new bonds backed by a portion of the tax. Banks including UBS, Citigroup and Goldman Sachs reaped more than $900 million in fees to manage Puerto Rico’s $126.6 billion of bond sales since 2000. These helped the government, which employs more than a quarter of the workforce, put off cuts. Puerto Rico paid dearly to tap the market in March, 2014, issuing the junk-rated bonds at an 8.7 percent interest rate. Like U.S. states, it can’t file for bankruptcy. Puerto Rico’s special tax status dates to 1917 and the passage by the U.S. Congress of the Jones-Shafroth Act, which also granted Puerto Ricans U.S. citizenship. Puerto Rico, ceded to the U.S. in 1898 after a war with Spain, has relied for 50 years on this and other tax breaks to drive its economic development. The incentives attracted pharmaceutical, textile and electronics companies. The U.S. phased out the incentives from the mid-1990s to 2006, contributing to the loss of 80,000 jobs. Since 2006, Puerto Rico’s economy has contracted every year except one and its poverty rate is now almost double that of Mississippi, the poorest state. Official unemployment is 11.8 percent and the island’s murder rate is more than five times that of the U.S. As jobs disappear, more Puerto Ricans are emigrating. Population is heading toward a 100-year low by 2050.

The Argument

Puerto Rico faces the difficult prospect of boosting its economy while fixing its public finances. Since taking office in 2013, Governor Alejandro Garcia Padilla has moved to raise excise taxes and expand the sales tax base, and to restructure public pensions and reduce the deficit. At the same time, the Puerto Rican government created tax breaks to entice non-residents to move to the island and invest. New residents are exempt from Puerto Rican taxes on interest, dividends and capital gains. Businesses that move and provide services for clients outside of Puerto Rico pay a 4 percent tax rate. Sergio Marxuach, policy director at the Center for a New Economy, a think tank in San Juan, says the government needs to cut spending on services, reduce business tax credits and increase investment in education, infrastructure and technology.

THE REFERENCE SHELF

• The Federal Reserve Bank of New York made recommendations for improving Puerto Rico’s competitiveness in 2014.
• Puerto Rico presented its economic development and budget plans inpresentations aimed at potential bond investors from 2006 to 2013.
• The Center for a New Economy, a San Juan think tank, collects ideas for economic reforms.
• National Public Finance Guarantee Corp., a bond insurer, reports on risk factors and trends affecting Puerto Rico.
• Bloomberg News coverage of Puerto Rico.

FIRST PUBLISHED FEB. 11, 2014

To contact the writers of this QuickTake:

Michelle Kaske in New York at mkaske@bloomberg.net

Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this QuickTake:

Jonathan I. Landman at jlandman4@bloomberg.net

For more, read this QuickTake: Puerto Rico’s Slide