NEW YORK – Shares of bond insurers tumbled Monday after Puerto Rico's governor said the U.S. territory had little hope of paying its $72 billion debt.
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Puerto Rico's bonds are popular with U.S. mutual funds because they are tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.
Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met.
Puerto Rico Gov. Alejandro Garcia Padilla is hoping to defer debt payments while negotiating with creditors, spokesman Jesus Manuel Ortiz said late Sunday.
Mark Palmer, an analyst with BTIG, said that MBIA has $4.54 billion of gross insured exposure to Puerto Rico's debt. He believes that uncertainty surrounding Puerto Rico makes bond insurer stocks "unbuyable until clarity around the situation develops and the magnitude of the losses the insurers stand to realize becomes more apparent."
Palmer stripped his 'buy' rating from MBIA Monday.
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It's been a rough go for bond insurers with so many governments under financial duress, both at home and abroad.
Detroit General Obligation bondholders are getting only 74 cents on the dollar as the city works through insolvency. Chicago is facing a massive pension pileup and credit agencies are visiting the standing of Illinois as well as New Jersey repeatedly.
Puerto Rico's situation has drawn comparisons to Greece, where the government declared this weekend that banks would be closed for six business days and restrictions were imposed on cash withdrawals.
Greek bonds plunged, sending the two-year yield up more than 12 percentage points to 33 percent.
Closely watched spreads in Spain and Portugal also rose, though not nearly as much. That suggests that while the prospect of a Greek exit from the euro is unnerving European investors, there is not much concern yet that it could destabilize weaker economies.
Here's a look at how some bond insurers are faring in morning trading:
MBIA Inc. down 14 percent, or $1.17, to $7.14.
Assured Guaranty Ltd. down 9 percent, or $2.57, to $24.85.
Ambac Financial Group Inc. down 10 percent, or $2.25, to $20.13.