Bond Insurers Able to Absorb Puerto Rico Ratings Cut, S&P Says

Assured Guaranty Ltd. and MBIA Inc.’s municipal insurance unit are sufficiently capitalized for losses on municipal debt if Puerto Rico is downgraded, according to Standard & Poor’s.

Assured has a capital cushion of $450 million to $500 million against exposure to Puerto Rico of $5.4 billion and MBIA’s National Public Finance Guarantee Corp. has $350 million to $400 million with exposure of $5 billion, S&P credit analysts Marc Cohen and David Veno wrote in a report today. S&P said last week it might cut Puerto Rico’s debt to junk within 90 days if it’s unable to access capital markets. Puerto Rico’s general obligations carry the lowest S&P investment-grade rating of BBB-and a similar Baa3 at Moody’s Investors Service, Bloomberg data show. Moody’s issued a similar warning Dec. 11.

“The companies have sufficient capital cushions to absorb higher theoretical losses from negative rating actions on Puerto Rico, while maintaining sufficient liquidity to pay possible losses through 2015,” the S&P analysts wrote.

Debt of the commonwealth is rallying by the most in two years, returning 3.1 percent in January, as it prepares to sell long-term bonds next month for the first time since August. Proceeds would allow Puerto Rico to balance its budgets after rising interest rates in 2013 hindered the sale of bonds backed by sales-tax revenue.

Capital Charges

“Puerto Rico’s government has indicated that it is committed to honoring its obligations to bondholders and has demonstrated its commitment by the responsible and proactive actions it has taken to address its significant economic challenges,” Adam Bergonzi, chief risk officer at National Public Finance, said in an e-mail. MBIA is based in Armonk, New York. “We are continuing to monitor the situation closely, but we do not expect a default by Puerto Rico.”

S&P uses capital charges, which are based on rating category and asset type, to calculate theoretical losses to insurers over a four-year period, testing with economic conditions similar to those of the Great Depression, according to S&P’s Cohen. The company’s statement today means Assured and National Public Finance have more than enough capital to withstand downgrades to as low as B.

Governor Alejandro Garcia Padilla, of the Popular Democratic Party, who took office a year ago, has said the island will fully repay its debts on time. Officials plan to sell long-term debt next month to balance budgets after rising interest rates last year hindered the issuance of bonds backed by sales-tax revenue. Those securities have the highest rating among the island’s credits.

Assured is “pleased that S&P continues to publicly recognize our ability to manage” its Puerto Rico “exposures,” Robert Tucker, a spokesman for the Hamilton, Bermuda-based insurer, said in an e-mail.

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