Below is the letter to MBIA shareholders’ written by CEO Jay Brown. MBIA is another major bond insurer similar to AGO, although AGO is the much stronger company. I wanted to share the letter because he makes some key points regarding exposure to Puerto Rico, which I believe to widely misunderstood by the overall market.
“We have no doubt that the level of uncertainty associated with our insured Puerto Rico credits factored very heavily into the negative movements in the price of our shares. While we acknowledge that the potential for losses from our Puerto Rico credits presents our biggest current challenge, we continue to believe that the market has overstated the likely impact on MBIA. The statements and communications by and on behalf of the Puerto Rico government have undoubtedly contributed to the uncertainty about what will happen to Puerto Rico’s debt obligations. However, we are not going to fall into the “perception trap” that many in the press have – there is no aggregate amount of debt owed by a single Puerto Rico entity. In fact, there are different obligors with distinct legal debt structures, with different debt loads and different revenue streams available to support those obligations. While the Puerto Rico government has invoked “clawback” provisions that temporarily divert certain revenues from select debt obligations to service Commonwealth general obligation debt, it is also true that most debts of the Commonwealth and its instrumentalities are supported by independent, dedicated revenue sources for their repayment. And those debt obligations were issued through discrete debt indentures that include and incorporate specific rights and remedies for their bondholders.
In our case, we currently have just under $4 billion in gross par exposure spread across eight different credit profiles. Our exposure to the Puerto Rico Government Development Bank was fully retired in 2015, and we saw meaningful paydowns of other credits in 2015 – over $675 million of gross par has been retired from our Puerto Rico exposures since year-end 2014. We’ve also made significant progress with our largest exposure – $1.4 billion of gross par to the Puerto Rico Electric Power Authority (PREPA) – and we are a participant in a consensual restructuring that was agreed to by the majority of its creditors. If implemented, the restructuring agreement presents a promising path forward for PREPA, its debt holders and their customers, but additional conditions need to be satisfied to before the transaction can be completed this year.”
Jay Brown articulates the fact that there is no $70 billion figure of Puerto Rico debt. Instead there are individual obligors such as PREPA (electric utility), PRHTA (highway authority), and PRASA (sewer) that have their own debt structures and revenues to service that debt. Profligate government spending, corruption, and incompetence by leaders has put Puerto Rico in a situation where it has trouble accessing capital markets. These problems can be alleviated to a great extent by the control board that is likely to be in any legislation involving Puerto Rico. As each obligor’s debt is worked out, I believe that the actual losses will be far lower than most market participant’s perceptions are. Not all debt is created equal and the debt insured by the bond insurance companies have a lot more protection than some of the other weaker credits that are out there.