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

WhatShares 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 whatMBIA 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.

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 whatRatings 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.

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