Why MBIA Inc. Dropped 12% on Talk of a Puerto Rico Restructuring

By Markets Fool.com

Continue Reading Below

What
Shares of municipal bond insurer MBIA traded down by more than 12% this afternoon, plunging to a new 52-week low as Puerto Rico considers avenues for restructuring its debt and escaping a fiscal crunch.

So what
MBIA has insured more than $4.5 billion of municipal bonds issued by Puerto Rico. In recent days, the island territory has brought in a number of experts to help negotiate new terms with creditors, which may include haircuts, reductions in interest payments, or extended repayment periods. In the most telling example, Puerto Rico hired Steven Rhodes, the former bankruptcy judge who oversaw the Detroit bankruptcy, as an advisor.

In focus today are the territory's general obligation bonds. The Puerto Rican Constitution guarantees repayment before expenses like the salaries of government workers. Thus the general obligation bonds were seen as particularly safe from loss.

But investors increasingly believe that a restructuring may leave nothing off the table. Puerto Rican Governor Garcia Padilla has called for a solution that would allow Puerto Rico to file for Chapter 9 bankruptcy protection, a move that is currently off the table only because Puerto Rico is a U.S. territory, not part of a U.S. state.

MBIA's 3 Largest Puerto Rico Exposures

Bond issuer

Amount

Puerto Rico Electric Power Authority

$1.42 billion

Puerto Rico Commonwealth General Obligation

$1.11 billion

Puerto Rico Highway and Transportation Authority

$792 million

Continue Reading Below

Source: Company quarterly report.

MBIA's two largest exposures may incur losses starting tomorrow. Puerto Rico must make a $655 million payment on its general obligation debt and a $400 million payment on its General Obligation bonds on Wednesday, July 1. If it doesn't make payments as scheduled, insurers may be forced to finance the payments to avoid a default.

Now what
Ratings agency Standard & Poor's lowered the island's credit rating to CCC-minus from CCC-plus, noting that a default, distressed exchange, or redemption of its debt seemed "inevitable" within the next six months. The ultimate losses are difficult to quantify, but given that MBIA's exposure of $4.5 billion dwarfs its shareholder's equity and loss reserves, investors have every reason to be concerned about the losses MBIA will sustain.

The article Why MBIA Inc. Dropped 12% on Talk of a Puerto Rico Restructuring originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.