U.S. municipal bond insurers set to withstand Puerto Rico default
By Edward Krudy
NEW YORK, August 5 (Reuters) - U.S. municipal bond insurers will likely weather any potential losses as a result of Puerto Rico's debt crisis but a downgrade to their ratings or a loss of investor confidence longer-term could pose a serious challenge to their post-crisis recovery.
Bond insurers insure about $13 billion of Puerto Rico's $72 billion debt load, substantially more than they did in Detroit which centered on a few hundred million dollars of city debt, meaning that losses for the insurers could be much higher.
"We're monitoring it closely because we don't know what any type of settlement or restructuring will be," said David Veno, who analyzes bond insurers for Standard & Poor's.
Bond insurers such as MBIA and Assured Guaranty were hit during the financial crisis after they ventured into mortgage-backed securities in the years before 2007. Ratings agencies slashed their AAA ratings to junk or withdrew them altogether. That meant bond issuers no longer benefited from their coverage.
Bond insurers essentially lend their rating to municipalities who use insurance to lower their borrowing costs.
For example, Puerto Rico's insured bonds are trading at hefty premiums compared to uninsured bonds. Insured debt of the Puerto Rico power authority, which is currently in restructuring talks with creditors, recently sold for around 96 cents on the dollar, while uninsured debt is selling for around 54 cents.
Before the crisis, around half of all new municipal bonds had insurance from nine insurers, with nearly 60 percent covered in 2005. By 2012, that had fallen to just 3.6 percent, although it has climbed steadily to 6.6 percent in the first quarter of this year, Thomson Reuters data shows.
Although insurers have slowly recovered since then, Puerto Rico could be their first major test in terms of losses. Continuación...