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31 October, 2017

Hurricanes & PR Revised Budget Likely Mean Deeper Bond Losses

The Takeaway:

In early October, the PROMESA Financial Oversight and Management Board (FOMB) published a letter to Congressional leaders following the devastation in Puerto Rico (PR) due to Hurricanes Irma and Maria. FOMB stated that the hurricanes “have fundamentally changed Puerto Rico’s reality” and are expected to cause “lower revenues, higher costs, and delayed or reduced cost-saving measures that had been required by the FOMB’s fiscal plans.” It is widely expected that FOMB will revise the March 13 Certified Budget to reflect the hurricanes’ effect on the Commonwealth’s fiscal outlook. In this report, we make adjustments to the certified budget and estimate the potential increase in insured bond losses. We conclude that a 23% reduction in expected budgetary improvements would effectively erase PR’s ability to service any debt. We estimate that a reduction in the certified budget could reduce PR’s debt service capacity (DSC) by 20-60%, which would increase losses for creditors and bond insurers. We maintain our view that Assured Guaranty, Ltd. (AGO), MBIA Inc. (MBI), and Ambac Financial Group (AMBC) will incur significant losses under Title III of PROMESA. AMBC and MBI face the highest risk given their exposure to COFINA bonds.