Puerto Rico's 75-Cent Debt Poised to Profit as Assured Buys CIFG

  • $133 million of convention center bonds will switch companies
  • Assured has most claims-paying resources among muni insurers

As Puerto Rico’s debt crisis escalates, a sliver of island bondholders is poised to receive an unexpected windfall.

Investors in $133 million of Puerto Rico Convention Center District Authority bonds backed by CIFG Assurance North America have seen their securities trade between 70 cents and 80 cents on the dollar this year, data compiled by Bloomberg show. With Assured Guaranty Ltd. announcing Wednesday that its subsidiary will acquire CIFG, those securities could soon be worth near 100 cents, based on comparable trades in commonwealth debt.

Municipal bond insurers of all ilks have exposure to Puerto Rico’s $70 billion of debt, ranging from units of Assured, with a financial strength rating of AA from Standard & Poor’s, to unrated Financial Guaranty Insurance Co., which only paid policyholders 22 percent of the island’s missed interest in January. The strongest of them have created a haven for mutual funds and individuals who sold off much of the commonwealth’s bonds when their ratings fell to junk.

Both the convention center authority and the commonwealth’s highways agency were subject to an executive order signed by Governor Alejandro Garcia Padilla in November that lets the government “claw back” revenue meant for those bonds to pay public debt instead. Neither have defaulted because they drew on reserve funds. 

S&P expects the agencies to do the same on July 1 to make bond payments. Yet raiding reserves again would probably leave their trustees without enough money to meet Jan. 1 obligations.

Price Check

The CIFG-backed convention center obligations due in July 2036 traded Wednesday at an average 75 cents on the dollar, signaling doubts from investors about full future payments.

By contrast, Puerto Rico Highways & Transportation Authority bonds with an identical maturity and insured by Assured Guaranty Corp. traded Wednesday at 101 cents on the dollar, data compiled by Bloomberg show. The Assured unit will absorb CIFG under the terms of the agreement.

With the acquisition expected to be completed mid-year, CIFG debt would become backed by Assured, meaning the bonds should be worth the same as Assured’s other obligations. That’s a boon for MacKay Shields and Nuveen Asset Management, the biggest mutual-fund owners of the convention center securities, Bloomberg data show.

Assured as a whole has $12 billion in claims-paying resources, the most of any municipal bond insurer. As of year-end, it had $8.6 billion in Puerto Rico debt service exposure, according to company filings.

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