Insurance companies could be on the hook for hundreds of millions of dollars if the government of Puerto Rico defaults July 1 on $1.9 billion worth of debt payments.
The default would be the largest in the territory’s history, and its fourth default in the past year. Previously, Puerto Rico’s largest default was on May 2 when the Government Development Bank, formerly the island’s primary fiscal agent and lender of last resort, defaulted on $367 million due to its bondholders.
The July 1 payment includes $780 million worth of General Obligation bonds, which is meant to be paid out before all others.
If these payments are not met, creditors could get their money via insurers, including about $364 million from Assured Guaranty. About $184 million of that covers General Obligation debt. Assured has more than $5 billion in total Puerto Rico exposure.
The other two bond insurers implicated are Ambac Financial Group and National Public Finance Guarantee Corp.
It is unclear just how much insurers will have to pay in the event of a default, though analysts say the ultimate impact will be blunted because all three companies have cash reserves set aside for such claims. The insurers will also agree to pay only the amount due on the day it is due – not accelerate payment on defaulted bonds.
“There will be some instances of nonpayment but for bond insurers it’s not going to be a catastrophe,” Edwin Groshans, a Height Securities analysts, told the
Wall Street Journal.
There is some relief in sight for Assured and other insurers with exposure to Puerto Rican debt, however.
US President Barack Obama is set to sign the Puerto Rico Oversight Management and Economic Stability Act (PROMESA) before the territory defaults on most of its debt. Passed in a bi-partisan compromise in Congress Wednesday, PROMESA provides a halt to any creditor litigation brought against the Puerto Rican government and its debt issuing agencies retroactive to December.
The bill has not eliminated the risk of defaults, but it has proved a boon to insurers, as the stock prices for the three publicly traded monoline insurance companies implicated in Puerto Rican debt rose late Wednesday. Assured’s stock rose 3.56% to $24.67 per share.
“The reality is that for all of the negative catalysts that lie ahead, credit markets and insurers are relieved that they now get to deal with adults, that is talk with a control board, rather than the governor and his staff,” said Height Securities analyst Daniel Hanson.
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