I did see the Palmer.... the Puerto Rico GO bonds are on fire, flying higher
Here is the Palmer note:
Municipal Bond Insurers
Draft of New Puerto Rico Fiscal Plan Shows Sufficient
Capacity to Pay Debt; Positive for AGO, AMBC, MBI
Puerto Rico’s financial oversight board this morning published a draft of
the latest iteration of the Commonwealth’s Fiscal Plan, and it includes one
exhibit in particular that we believe should be encouraging to investors in
municipal bond insurers Assured Guaranty (AGO, Buy, $52 PT), Ambac
Financial Group (AMBC, Buy, $26 PT) and MBIA (MBI, Buy, $14 PT).
? Exhibit 12 of the draft Fiscal Plan, on page 23 of the document, shows
the Puerto Rico government’s projections for the Commonwealth’s
surplus after taking into account fiscal measures and structural
reforms that are outlined within the plan. The exhibit shows that the
government believes it would run surpluses from FY18 through FY23
after paying the contractual debt service owed in each one of those
years.
? In other words, Puerto Rico in the draft Fiscal Plan acknowledges that
it will have the capacity required to pay its debts. We believe this is a
significant positive for AGO ($4.97bn of net insured exposure to
Puerto Rico’s debt as of June 30), AMBC ($1.97bn of net insured
exposure) and MBI ($3.40bn of gross insured exposure) as the
potential for the insurers to incur large losses on their insured
exposures to the Commonwealth’s debt is clearly the biggest reason
each of their stocks trade at deep discounts to their adjusted book
values per share.
? Exhibit 12 shows that Puerto Rico is projecting that its surplus will be
$451mm in FY18, $860mm in FY19, $1.593bn in FY20, $918mm in
FY21, $1.375bn in FY22 and $1.138bn in FY23.
? We believe the new Fiscal Plan is more creditor-friendly than prior
iterations because Puerto Rico’s government and oversight board
want the COFINA sales tax bond settlement to be consummated, and
the argument by the unsecured creditors committee (UCC) to the Title
III court that the most recent Fiscal Plan did not allocate a sufficient
amount of funds to pay debt service to all creditors had threatened
that outcome.
? Meanwhile, Exhibit 15 of the draft Fiscal Plan on page 27 shows that
creditors and the insurers still have some work to do in terms of
bringing the Puerto Rico government and financial oversight board
toward a more realistic take on how much Medicaid funding the island
will receive from the U.S. government going forward.
Exhibit 15 shows that the government is projecting that federal
funding of the island’s Medicaid requirements will drop from $2.3bn in
FY19, $2.67bn in FY20 and $1.572bn in FY21 to $410mm in FY21,
$427mm in FY22 and $445mm in FY23.
? While the FY21 to FY23 amounts are modestly higher than they had
been in the last iteration of the Fiscal Plan – they had been $341mm,
$357mm and $375mm – they are still far below the historical trend.
AGO on October 11 issued a news release in which it noted that the
current Fiscal Plan “illogically assumes” that the federal share of
Puerto Rico’s Medicaid funding would plunge from 83% in FY19 to
10% in FY21, FY22 and FY23.
? AGO added that the oversight board’s assumptions with regard to
Puerto Rico’s future federal funding for Medicaid “has no basis in
historical evidence. Indeed, Puerto Rico for many years has received
well over $1bn in annual federal funding for Medicaid.
? We believe that the recognition of the high likelihood that funds in
future years would make it clear that the Commonwealth has
sufficient resources to pay its debts in full which would support the
case for a consensual deal with creditors and insurers of its general
obligation (GO) bonds at a recovery level well above the level at which
the bods currently trade.
