I’ll be writing about this in more detail in a few weeks, but new information has been released about the negotiations between Puerto Rico and its creditors. While no deal has been agreed to as was expected, Puerto Rico has been raising the prices at which it is willing to settle the debts for. The reality is that the government of Puerto Rico wants to cede as little power to the Fiscal Control Board as is possible, so negotiations should continue to improve. It is my belief that AGO is either fully, or overly reserved as to what the ultimate losses will be on Puerto Rico debt. This will take time to play out, but AGO has been aggressively adding to its loss reserves and according to my analysis, they should be just about fully covered, which would mean that this should no longer be a headwind for profits. Keep in mind that even with this reserving taking place, AGO has been posting very solid profits each quarter and growing book value. In addition, more clarity should allow the company to request a special dividend from its insurance subsidiaries, which could be used to either buy back stock, or increase the dividend. MBIA is also in a terrific position. Its large exposures are to some of the best credits, which should keep losses very manageable. Both stocks are so undervalued it is ridiculous. July 1st is a big day as Puerto Rico has almost $2 billion in debt due. They may elect not to pay a decent portion of that, but ultimately this will get worked out either through negotiations or through the Control Board. Liquidity is absolutely not an issue for the bond insurance companies and they likely will recoup any payments that they have to make in the interim. Below are a few articles I’d suggest reading if you are interested in learning more about the situation!
Monoline bull cuts Puerto Rico-related loss estimates
Puerto Rico, Bondholders Remain at Odds
MBIA – Misunderstood and Dramatically Undervalued