The companies with the most at stake in Puerto Rico’s debt crisis have become buyers of the island’s bonds.
MBIA Inc.’s National Public Finance Guarantee Corp. and Ambac Financial Group, which together insure about $19 billion of the U.S. territory’s principal and interest against default, have used millions from their investment portfolios to buy Puerto Rico securities they guarantee. Some of the bonds trade for as little as pennies on the dollar because no payments come due until decades from now, when the commonwealth’s current bout of fiscal turmoil will be a distant memory.
“As the bonds are insured by National, we are very familiar with the credit profile of the bonds and the purchase price made it an attractive investment, especially for insured debt,” Chris Young, National’s chief financial officer, said in an e-mail.
The investments reduce the payouts the insurers could face if the island defaults and signal a bet that at least some bondholders will fare better-than-expected when Puerto Rico restructures its $70 billion of debt. Governor Alejandro Garcia Padilla wants owners of tax-backed securities to accept almost $23 billion less than they’re owed, with the prospect of recovering their losses if the island’s economy breaks out of its years-long recession.
It’s not the first time the insurers have bet that prices of bonds they stand behind have fallen too far. During last decade’s housing crisis, MBIA bought residential mortgage-backed securities that it was left covering after a default. The strategy reduced the outflow of claims payments and allowed the company to sell at a profit when prices recovered.
“It’s the normal course of business for them,” said Edwin Groshans, an analyst who tracks the insurers at Height Securities, a Washington-based broker dealer. “They’ve been insuring bonds for decades, so they have a very long track record of what a loss content is in certain scenarios.”