In an interesting twist to the saga of the Commonwealth of Puerto Rico’s debt crises, Bloomberg News reports that some of the insurers of commonwealth municipal bonds have purchased for their investment portfolios bonds that they have insured. Recent purchases include over $585 million of the par amount of Puerto Rico bonds insured by MBIA’s National PFGC, and over $85 million of the par amount of insured Ambac bonds. Most of the bonds have long maturities and have traded at deep discounts.
By purchasing discounted bonds that they insure, the insurers would actually lower their payouts if the commonwealth defaults on the debt service payments of the bonds. The investment portfolios of the insurers could also benefit if a bond restructuring results in higher recovery payments for bondholders. The commonwealth has proposed that bondholders take a $23 billion haircut, with the potential to recover lost amounts if future revenues grow at levels above specified targets. Some bondholders have already countered, requesting protection from the proposed haircuts. We believe that there will be a lengthy period of negotiations before a restructuring plan is finalized.
Source: Bloomberg News