A "RARE" HIGH YIELD WINDOW OF OPPORTUNITY*
Attentive High Yield Municipal Bond Investors Earn Triple Tax Exempt** Interest On Puerto Rico Bonds Insured by Assured Guaranty "A2/AA", National Public Finance Guarantee "A3/A" and AMBAC "NR"
INHERENT AND POTENTIAL VALUE EXIST IN INSURED PUERTO RICO BONDS GUARANTEED BY THE FOLLOWING MUNICIPAL BOND INSURERS
Assured Guaranty: #1 Bond Insurer
Rated: Moody's "A2" / S&P "AAâ" Claims Paying Resources: $12.2 billion
Investment portfolio: $11.7 billion, insured par value outstanding $275 billion, NYSE: AGO
High Quality Insured Exposure… Assured Guaranty insures 7.5% of the $3.8 trillion municipal bond market. Assured Gty’s total insured exposure is $275 billion rated “A-” average: Municipal bond exposure is approx. $218 billion average rating “A-”, U.S. structured finance is approx. $13 billion average rating “A-” and international exposure is approx. $44 billion rated “BBB+” to “A”. Only 4.8% of Assured’s U.S. public finance exposure reflects bonds downgraded below investment grade.
Paid All Claims… Of approximately 10,000 U.S. public finance exposures, net recovery on losses are expected to involve less than a dozen issuers. Assured has paid claims on: Stockton, Jefferson County Sewer Authority, Harrisburg Incinerator Authority and Detroit. As a result of negotiations, over the long term, Assured is positioned to make substantial recoveries on losses incurred as a result of bondholder claims on these issues. Many informed GMS clients purchased Jefferson County Assured insured bonds at discounts. Claims related to Jefferson County and Detroit were easily within Assured Gty’s reserves.
Recent Deterioration of The Credit Quality of Puerto Rico Debt…Puerto Rico bonds were investment grade when Assured Guaranty insured over $5 billion of various Commonwealth debt. Today Puerto Rico bonds are under severe financial pressure as the Island deals with a self-proclaimed financial crisis. S&P, taking into consideration Assured’s exposure to Puerto Rico issuers, maintained its high quality “AA” rating on Puerto Rico bonds insured by Assured. S&P expects Assured to maintain its very strong capital adequacy. Assured’s $11.7 billion “A+” rated investment portfolio generates roughly $400 million annual investment income. This alone is higher than the next ten years’ annual debt service on its Puerto Rico bond exposure.
Claims Paying Resources Relative to Guaranteed Debt Service Highest Since 2009… Rapidly declining insured exposure due to refunding, terminations and scheduled amortizations accelerate capital growth and lessened exposure. Assured’s current insured exposure of $275 billion is less than half of 2009 levels and is expected to drop to $222 billion by 2019. Assured’s Claims Paying Resources of $12.2 billion relative to guaranteed debt service is the highest for the insurer since 2009.
The scale of Assured’s capital is its competitive advantage. It can insure significantly large bond deals. Assured’s participation may be key to Puerto Rico’s future capital access. With its significant claims paying resources, highly rated Assured has evolved into the most dominant municipal bond insurer.
National Public Finance Guarantee: Solid Claims Paying Ability
Rated: Moody’s “A3” / S&P “A” Claims Paying Resources: $4.6 billion,
Investment portfolio: $4.1 billion, insured par value outstanding $94 billion, NYSE: MBI
Winning Major Legal Battles Got National a new life… National became separate from MBIA after the latter repaid a $1.7 billion loan to National from improved liquidity. Newly capitalized in 2009 National is a municipal only bond insurer. National’s leverage with a muni only portfolio is lower than pre-crisis MBIA. National has had minimal default claim payments since its inception. National’s $874 million unearned premium reserve and $4.1 billion investment portfolio annually generate well over $100 million of steady premium earnings and investment income.
National is Well Capitalized… National has solid claims paying resources of $4.6 billion. Its $94 billion insured portfolio is 94% investment grade. National’s $4.1 billion portfolio contains 87% “A” or higher investments. Although National’s financial strength is evidenced by $1.7 billion of excess capital above estimated S&P “AAA” requirement, S&P lowered its financial strength rating to “A” from “AA-” citing a weaker business profile to peers. Even without writing new policies between 2008-2014, National is earning substantial annual income of $149 million from its existing insured portfolio: premium earnings $32 million and investment income $117 million in FY16.
National's Puerto Rico Exposure... National insures approx. $4 billion Puerto Rico bonds. National owns $585 million senior lien COFINA bonds, representing 16% of its total COFINA exposure.
National is a Well Respected Municipal Bond Insurer… It has a strong capital base, stable earnings and proven bond insurance infrastructure. Investors seek the strong trading value of National’s bond insurance as it is capitalized well above S&P’s “AAA” capital level. Current ratings, Moody’s “A3”/S&P “A”, will limit National’s value to primary market issuers, but not its value to secondary market investors seeking “A” rated tax exempt bonds.
AMBAC: Represents Significant Value
Rated: “Non-Rated” Claims Paying Resources: $8.8 billion,
Investment portfolio: $6.3 billion, insured par value outstanding $71 billion, NASDAQ: AMBC
Reorganization eliminated risky exposures from the General Account. This added considerable value to AMBAC insured municipal bonds held in its General Account… Newly capitalized AMBAC emerged from bankruptcy in May 2013. Risky exposure (15% of AMBAC insured exposure), primarily residential mortgage backed securities, were taken out of the General Account and placed in a separate Segregated Account. AMBAC expects to conclude the rehabilitation of the Segregated Account in the near future.
The General Account is Now Highly Protected With a Senior Claim on AMBAC Claims Paying Resources… 99% of AMBAC insured munis are in the secure General Account. AMBAC’s General Account (85% of AMBAC insured exposure) is of high credit quality. AMBAC insured bonds held in the General Account are roughly 86% to 90% investment grade rated “Baa” or higher making them highly unlikely to file a claim on the insurance guarantee. The claims paying resources are close to $9 billion. AMBAC’s insured exposure of $71 billion is roughly 16% of 2008 levels. Surging bond calls, debt refinancings and maturing bonds have reduced insured exposure by around $50 billion annually for the last six years.
AMBAC Puerto Rico Exposure... AMBAC's Puerto Rico exposure is $2.1 billion, 91% is secured by revenue pledges and 9% is general obligation debt which carries constitutional protection. Opportunistically, AMBAC has purchased 30% of AMBAC insured Puerto Rico sales tax secured COFINA bonds and 12% of rum tax secured PRIFA bonds. Contributing stable steady annual income of over $300 million is AMBAC's $6.3 billion investment portfolio and $3.9 billion loss reserves. AMBAC's investment portfolio is 55% investment grade. Since AMBAC no longer insures new bond issues a credit rating is no longer necessary. Credit ratings serve no purpose in AMBAC's business model. AMBAC is now in run-off mode and when all current insurance policies expire AMBAC shareholders will benefit from a remaining assets dividend. AMBAC policyholders gain from a leverage ratio of 8.1 as $8.8 billion claims paying resources insure $71 billion insured par outstanding. AMBAC is very capable of paying any General Account claims, a positive declaration for AMBAC insured municipal bonds and a comfort to holders of AMBAC insured bonds.
AMBAC is a Good Place For High Yield Municipal Bond Investors to Realize Value… Among well-informed investors there is substantial demand for all AMBAC insured municipal bonds.
If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information
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