MBIA, Assured Guaranty's Exposures to Puerto Rico Bonds Manageable: Moody's

MBIA and Assured Guaranty will be able to absorb possible losses on the electric authority, PREPA, bonds they insure without significant pressure on their credit profiles, however more systemic defaults by Puerto Rico would exert meaningful negative pressure, according to a report from Moody's Investors Service.

Puerto Rico (B2 negative) is plagued by weak liquidity, increasing leverage and a contracting economy that has left it little ability to generate new revenues. In July, the commonwealth adopted a debt relief law, the Puerto Rico Public Corporations Debt Enforcement and Recovery Act, that provides a clear path to default for the commonwealth's public enterprises.

"Although we expect some losses associated with Puerto Rican public corporation debt, the severity and timing of those losses is uncertain," says Brandan Holmes, a Moody's vice president. "The impact of a default  would differ by guarantor, depending on the nature of each guarantor's exposures to Puerto Rico and its overall financial strength."

Assured's total net exposure is $4.9 billion, its gross exposure is $6.0 billion; MBIA's net exposure is $4.5 billion. Other guarantors with exposures to commonwealth debt are Radian Asset Assurance (Ba1 negative) and Berkshire Hathaway Assurance Corporation (Aa1 stable). Radian's exposure amounted to $423 million as of September 30, 2014. BHAC's is limited, and primarily on a second-to-pay basis.

"Our scenario analysis suggests minimal pressure on the credit profile of all of the rated guarantors in the event of a loss severity of up to 50% if the electric authority, PREPA, was to default," says Holmes. "However, the credit profiles of some of the guarantors, particularly Assured Guaranty Re Ltd. and, to a lesser extent, National Public Finance Guarantee Corp. would be pressured in the event of more onerous losses."

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