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Kroll Bond Rating Agency Comments on Puerto Rico, Bond Insurers

By on January 14, 2016

SAN JUAN – Kroll Bond Rating Agency (KBRA) has an outstanding insurance financial strength rating of AA+, with a stable outlook, on both Assured Guaranty Municipal Corp. (AGM) and National Public Finance Guarantee Corp. (National). These two companies insure $7.9 billion of outstanding Puerto Rico debt. Of this amount, $3.8 billion gross par applies to AGM and $4.1 billion of gross par applies to National. The net par outstanding for AGM is $2.1 billion and net par outstanding for National is $4 billion. These amounts are as of September 30, 2015, although National’s exposures have been adjusted for the cancellation of $155 million of Puerto Rico Highways & Transportation Authority bonds.

This debt is issued by various obligors of the commonwealth and is insured by AGM and National with unconditional insurance policies that guarantee scheduled principal and interest when due on the underlying bonds. KBRA assesses the ability of AGM and National to meet all of their insurance policy obligations. KBRA does not rate any uninsured debt issued by Puerto Rico.

The following is a statement released by KBRA on Thursday:

Over the past few weeks there have been several developments in the course of Puerto Rico’s ongoing fiscal stress including the default on $37.3 million of interest payments due on January 1, 2016 out of a total of just over $1 billion due on that date. With respect to other developments, Puerto Rico’s electric utility, PREPA, reached a preliminary agreement in late December 2015 with a substantial proportion of their bondholders. The agreement requires that certain conditions be met, including the passage of implementing legislation by the Legislature of Puerto Rico. If finalized, the proposed restructuring would reduce debt service costs on PREPA’s outstanding debt and provide liquidity to the issuer.

In the rating analysis of bond insurers, KBRA develops stress losses for the insurer’s entire portfolio, including specific stress cases for deteriorated credit exposures such as Puerto Rico. The KBRA stress case for Puerto Rico incorporates various loss severities that vary based upon the obligor and extend through the final maturity of the debt. In designing this stress case, KBRA sought to construct a loss profile that was more severe than the expected or most likely case, but not beyond the realm of possible outcomes.

The fiscal distress of Puerto Rico continues and, in KBRA’s view, it is likely that various Puerto Rico issuers will miss debt service payments in the future and defaulted amounts will be larger in scope than what has occurred to date. These likelihoods are within the range of outcomes that are factored into our Puerto Rico stress case that is noted above. At this time, we see no indication that our stress case scenarios are not sufficiently onerous. Going forward, we will monitor developments in the Commonwealth as they arise and revise our stress scenarios if warranted.

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