Assured Guaranty Protects Insured Bondholders from Puerto Rico Default
Public Company Information:
HAMILTON, Bermuda--(BUSINESS WIRE)--Two bond insurance subsidiaries of Assured Guaranty Ltd. (NYSE: AGO) (together with its subsidiaries, Assured Guaranty) have made debt service payments to holders of insured general obligation (GO) and other bonds on which Puerto Rico and certain of its instrumentalities defaulted on July 1, 2016. The table below lists the defaulting issuers, the total principal and interest payments due July 1 from such issuers on bonds insured by Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC), and the total gross and net claim payments by Assured Guaranty. Assured Guaranty’s subsidiary Municipal Assurance Corp. (MAC) has no insured exposure to Puerto Rico.
As always, investors owning Puerto Rico-related bonds insured by Assured Guaranty will continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty’s insurance policies. The bond trustee, paying agent or, in the case of secondary market policies, custodian files the claim with Assured Guaranty on behalf of the bondholders, and therefore no action is required on the part of investors to receive their scheduled debt service payments. Assured Guaranty makes the claim payment directly to the relevant bond trustee, paying agent or custodian, who then distributes the funds in the same manner as when paid by the issuer. Under its standard municipal bond insurance policy, Assured Guaranty makes its payment no later than one business day after the claim is received, but not before the payment due date.
Assured Guaranty issued the following statement concerning the default:
It is regrettable that Puerto Rico has chosen to violate its constitution by ignoring the senior payment priority securing the Commonwealth’s GO bonds. The Puerto Rico constitution unambiguously states that the Commonwealth’s GO debt is to be paid before all other expenditures, and no funds may be applied to other obligations until the GO debt has been fully paid.
The default on all the GO bond payments continues the pattern of bad faith and reckless disregard for the law that has characterized the current administration. Budgets recently proposed by both the Puerto Rico administration and the Puerto Rico assembly have referenced available monies for at least partial payments of the GO bonds. The decision to default in full on GO debt payments appears opportunistic in the wake of the recent enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which has a provision staying creditor lawsuits. Throughout the last week of June, in an effort to facilitate the administrative aspects of making timely payments to insured investors, Assured Guaranty attempted, to no avail, to determine from Puerto Rico which Assured Guaranty insured credits would have claims for July 1 payments.
Additionally, Puerto Rico’s clawbacks, beginning in December 2015, of revenues pledged to certain non-GO debt would have been lawful and permissible only when all other revenue sources for GO payments had been exhausted, a condition that was not met at the time the clawbacks were initiated and that remains unmet. And insofar as clawbacks were constitutionally permitted, any funds clawed back may only be applied to pay GO debt. Puerto Rico has said that through June 30, 2016 it clawed back $453 million, of which it applied $164 million to GO bond payments due in January 2016. Of the $289 million balance, none was applied to the July 1, 2016 GO bond payments, $143 million is reportedly being held at the Government Development Bank where it is essentially frozen, and $146 million is reportedly being held at a commercial bank without disclosure of how such monies will be applied.
The Commonwealth’s disregard for the rule of law has disastrous ramifications for Puerto Rico’s credibility and future access to the capital markets. It will increase the future cost of borrowing to fund the infrastructure it needs to revive its economy, and the ultimate victims will be the people of Puerto Rico, who have been badly served by multiple administrations.
Assured Guaranty and many retail and mutual fund investors have helped Puerto Rico fund its infrastructure for many years and have every interest in seeing Puerto Rico return to financial health and economic vitality. Unfortunately, the essential steps to achieve those goals, including coming to fair consensual agreements with creditors, rooting out corruption and tax avoidance, and making accurate and timely financial disclosures, have not been undertaken by the current government.
Despite the historic size of Puerto Rico’s default and the current administration’s contempt for the rule of law, Assured Guaranty will continue to work with other creditors, current and future Puerto Rico administrations and the PROMESA oversight board to achieve consensual agreements that respect the constitutional, statutory, contractual and property rights of creditors while also supporting the island’s economic recovery.
Principal and Interest Due July 1, 2016 and Claims Paid by
($ in millions)
|Commonwealth Constitutionally Guaranteed|
|Commonwealth of Puerto Rico (General Obligation)||210||196|
|Puerto Rico Public Buildings Authority (PBA)||9||8|
|Public Corporations - Certain Revenues Subject to Clawback|
|Puerto Rico Highways and Transportation Authority (PRHTA - Transportation)||55||0|
|Puerto Rico Highways and Transportation Authority (PRHTA - Highway)||34||0|
|Puerto Rico Convention Center District Authority (PRCCDA)||15||0|
|Puerto Rico Infrastructure Financing Authority (PRIFA)||<1||<1|
|Other Public Corporations|
|Puerto Rico Electric Power Authority (PREPA)1||45||0|
|Puerto Rico Aqueduct and Sewer Authority (PRASA)||25||0|
|Puerto Rico Municipal Finance Agency (MFA)||9||0|
|Puerto Rico Sales Tax Financing Corporation (COFINA)||0||0|
|University of Puerto Rico (UPR)||0||0|
|Expected Additional Claims from Exposure Assumed by Providing Reinsurance:||11|
|Expected Reimbursement from External Reinsurers and Other Reimbursements:||-33|
|Estimated Net Claims Paid:||184|
|(1) Assured Guaranty participated in a bond purchase agreement that allowed PREPA to fund its full|
|payment to bondholders. See the Assured Guaranty press release dated June 30, 2016.|
Data is as of July 6, 2016 and is subject to adjustment. As of July 6, 2016, Assured Guaranty has received $205 million of claim notices, all of which have been processed in full. For any obligor where amounts were due but no claims were paid, the payments were made by the obligor or from its available reserves.
With $12 billion in claims-paying resources across its group of companies and approximately $400 million generated each year from its $11 billion investment portfolio alone, Assured Guaranty’s liquidity and capital position are very strong. This is further evidenced by looking at S&P’s capital model, where the company estimates that its excess capital was more than $2.6 billion above S&P’s AAA requirement as of year-end 2015.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statements made in this press release reflect Assured Guaranty’s current views with respect to future events and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. These risks and uncertainties include, but are not limited to, those resulting from adverse developments in Puerto Rico or at any of its instrumentalities, an inability or failure of creditors and the Commonwealth to implement a consensual restructuring, litigation that has already been initiated or may be initiated in the future, governmental or legislative action or inaction by Puerto Rico or the United States, other risks and uncertainties that have not been identified at this time, management’s response to these factors, and other risk factors identified in Assured Guaranty’s filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of July 7, 2016. Assured Guaranty undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Assured Guaranty Ltd. is a publicly traded Bermuda-based holding company. Its operating subsidiaries provide credit enhancement products to the U.S. and international public finance, infrastructure and structured finance markets. More information on Assured Guaranty Ltd. and its subsidiaries can be found at AssuredGuaranty.com.