(Adds analyst commentary in paragraphs 11-13)
By Nick Brown
SAN JUAN, Jan 5 (Reuters) - Puerto Rico’s latest default meant a $10.3 million hit for Ambac Financial, which insures some of the debt the island’s infrastructure authority PRIFA failed to pay on Monday.
Ambac had exposure to $10.3 million of PRIFA debt due on Monday, according to a Nov. 30 company report. An Ambac spokeswoman on Tuesday confirmed the insurer paid the full amount.
PRIFA owed a roughly $36 million payment on Monday but, according to a public filing by the trustee for the PRIFA bonds, failed to transfer funds to make the payment.
The move was expected after Puerto Rico’s Governor Alejandro Garcia Padilla announced last week that PRIFA would miss the payment. The strategic defaults are meant to help Puerto Rico combat an ongoing $70 billion debt crisis.
The trustee paid bondholders through a combination of cash on hand and payouts from Ambac, the filing said.
On Tuesday, Standard & Poor’s Ratings Services downgraded the PRIFA bonds to ‘D’, signifying default, from ‘CC’.
Ambac insures a face value of more than $500 million of PRIFA debt, according to public filings. In December, Garcia Padilla said he would redirect revenues earmarked to pay debt at PRIFA and other agencies, in order to pay Puerto Rico’s public debt, backed by its constitution.
Last week, Garcia Padilla said he had clawed back $163 million from those agencies to pay about $329 million of public debt. While some of those agencies still had reserves to pay their own debt, PRIFA did not, leading to its default.
Puerto Rico’s Public Finance Corp is also expected to default on a $1.4 million debt payment that was due on Monday.
Last month, Ambac and Financial Guaranty Insurance Co penned a letter to Garcia Padilla challenging the legality of the clawbacks, and some analysts expect litigation to follow.
“I think within a week of Ambac having to make that payment, they will file a lawsuit,” said Ed Groshans, an analyst with Height Securities, following Puerto Rico.
The $10.3 million payment on its own is small for Ambac, but with more than $2 billion total par exposure to Puerto Rico debt, the company could be in trouble if defaults continue.
A key issue for Ambac, Groshans said, is its $809 million par exposure to Puerto Rico’s so-called COFINA debt, backed by sales tax revenue whose structure could be attacked in court as Puerto Rico’s creditors battle for slices of a limited pie. (Reporting by Nick Brown; editing by Andrew Hay, Bernard Orr)