Puerto Rico may avoid generating losses for bond-insurance companies even though their stock performance suggests otherwise, according to Harry Fong, an analyst at MKM Partners LLC.
As the CHART OF THE DAY shows, shares of Ambac Financial Group Inc., Assured Guaranty Ltd. and MBIA Inc. have fallen in tandem with Puerto Rico general obligation bonds that mature in July 2041. The chart tracks their performance since July, when Detroit filed the largest municipal bankruptcy in U.S. history.
“The territory is taking the right steps” to bolster its finances, Fong wrote yesterday in a report. Legislation passed in June imposed a corporate income tax for the first time and cut the sales-tax rate to 6.5 percent from 7 percent. A bill was introduced yesterday to increase the proportion of sales taxes used for debt reduction, the Government Development Bank said.
Puerto Rico forecast a budget deficit of $820 million for the fiscal year ending next June, and had a $2.2 billion gap in the middle of fiscal 2013. The economy contracted 5 percent in July from a year earlier, according to data compiled by the development bank, in its worst performance since 2010.
Ambac, based in New York, has about $2.5 billion of exposure to the territory’s debt, according to Fong. Assured Guaranty, based in Hamilton, Bermuda, and Armonk, New York-based MBIA have about $5 billion each, his report said.
“It is far too early to assume the financial guarantors will experience Puerto Rico-related losses,” Fong wrote. The Stamford, Connecticut-based analyst has buy ratings on Assured Guaranty and MBIA. He’s neutral on Ambac, which emerged from bankruptcy protection on May 1.
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