Bond insurers Assured Guaranty and MBIA may be among the beneficiaries after a federal judge ruled Puerto Rico's Recovery Act was unconstitutional, according to analysts at BTIG LLC.
Assured Guaranty and MBIA stand to fare better in negotiations with the Puerto Rico Electric Power Authority, now that the threat of sizable court approved creditor losses has been removed, BTIG analysts Mark Palmer and Giuliano Bologna said.
"The invalidation of the Recovery Act removes the potential for a cram-down under the act's Chapter 3, which should provide Assured Guaranty and MBIA with more leverage in negotiations with PREPA, in our view," said Palmer, managing director at BTIG. "The Recovery Act's Chapter 3 would have been even more onerous from a creditor perspective than the U.S. Bankruptcy Code's Chapter 9."
Federal Judge Francisco Besosa, ruling on separate challenges by Franklin Templeton and Oppenheimer Rochester Funds, and Bluemountain Capital Management LLC, found the island's Recovery Act enacted in June was inconsistent with the U.S. Constitution and U.S. law and was preempted by the federal bankruptcy code. Puerto Rico's government said Monday afternoon that it would appeal the decision in the Court of Appeals for the First Circuit in Boston.
According to a BGIT report published on Monday, Assured had $1.006 billion in gross par exposure and $772 million of net par exposure to PREPA's debt as of Sept. 30, while MBIA had $1.422 billion of gross par exposure to PREPA as of the same date.
The report also noted that while the striking down of the Recovery Act eliminated the bankruptcy-like process for which the law provided, it does not preclude PREPA from defaulting on its debt.
"History has shown that Assured and MBIA typically have fared better than had been originally feared when municipalities whose debt they insured have defaulted due to their ability to negotiate terms favorable to their interests," Palmer and Giuliano wrote. "As such, we think the ruling improves the bond insurers' prospects for better recoveries on their PREPA exposures than many investors have been anticipating."
PREPA has $8.3 billion in bonds outstanding and another $673 million in bank loans. The electric utility is required to submit a turnaround plan by March, when its forbearance agreement with bondholders expires. However, it is expected to request an extension until June, according to the report.
