It looks as though the PROMESA legislation is going to be approved by the Senate and signed by the President in the very near future. While far from perfect, this legislation is also far from being a worst case scenario for both creditors and bond insurance companies.
It is hard to overstate just how attractive the long-term investments in AGO, MBI and even Ambac are.
Firstly, even the worst case scenario would have been very manageable for these companies in regards to Puerto Rico. Secondly, their exposures are amortizing at a rapid rate so we have great clarity as to the quality and financial health of the respective balance sheets. This enables the companies to execute shareholder-friendly activities such as stock buybacks and dividend increases. All 3 of these companies have greatly increased book value per share through these endeavors.
Rome wasn’t built in a day
It is important to note that Rome wasn’t built in a day. Investing takes time. It was actually a year ago today, when the governor of Puerto Rico stated that the debt was unpayable, beginning this crazy charade of threats and complaints. Since that time AGO and the other bond insurance companies have been increasing reserves, while still posting solid profits. It is my belief that these companies are either adequately reserved or overly-reserved barring some major misfortune as to who is ultimately appointed on the control board. Second quarter earnings might be quite a nice catalyst as these companies will reflect all known data points in determining their reserves and we now know quite a bit more than we did after the 1st quarter. AGO advanced by greater than 50% in 2012 in a very short period of time as we got more clarity on its legacy mortgage exposures. I don’t believe it is impossible that we will see something similar occur here, although the timing is always difficult to predict.
Nothing in my exhaustive research causes me to hesitate whatsoever in saying that I 100% believe these stocks will be meaningfully higher over these next few years.
July debt default
Lastly, we should find out by July 1st as to how much and which debts Puerto Rico will be defaulting on. Everybody knows that the island will default. How much and which credits they decide to pay is the only question. While it might generate big headlines, this is really not new information or highly significant as ultimately these credits are going to need to be worked out through consensual negotiations, or in the worst case through the control board. There will be no liquidity issues with the bond insurance companies. Even if they are forced to pay in the short-term, they will most likely recoup a very large percentage of those funds plus interest.
Below is an article which describes the legislation in more detail although I’m actually even more optimistic than the author on various issues: