Response to Moody's Report on Impact of Puerto Rico Exposure on Bond Insurers
December 17, 2013
While Moody’s recent report did not provide specific figures on how a Puerto Rico downgrade might impact our capital requirements relative to Moody’s capital model, an S&P report said that a downgrade of Puerto Rico credits from BBB to BB would result in an additional incremental capital charge to Assured Guaranty of $65 million and that a downgrade from BBB to B would result in an additional incremental capital charge of $115 million. S&P further said that at year-end 2012, Assured Guaranty’s capital cushion was between $450 million and $500 million. Moreover, in the nine months since year-end 2012, Assured Guaranty has reduced its total insured portfolio by almost 10% ($45.4 billion).
Additionally, Assured Guaranty’s obligation is to pay debt service only as it comes due, our Puerto Rico debt matures over the next 34 years, and we are not subject to forced acceleration. Puerto Rico credits insured by Assured Guaranty are presently current on their debt service payments, and the Commonwealth has never defaulted on any of its debt payments. Importantly, neither Puerto Rico nor its instrumentalities are eligible debtors under chapter 9 of the U.S. bankruptcy code.
Assured Guaranty believes, and Moody’s has also acknowledged, that recent measures announced by the new Governor of Puerto Rico and his administration in adopting its fiscal 2014 budget in June reflect a strong commitment to improve the financial stability of the Commonwealth and several of its key authorities. In addition, other actions -- including tripling the excise tax on petroleum products; a 60% average rate increase for the Puerto Rico Aqueduct and Sewer Authority; substantive pension reform; and the government’s reduction in the use of deficit financing and responsiveness to the capital markets -- demonstrate that officials of the Commonwealth are focused on making the necessary choices to help Puerto Rico operate within its financial resources and maintain its access to the capital markets.
As always, investors in Assured Guaranty insured bonds are protected by our unconditional guaranty that they will receive their principal and interest payments on time and in full in accordance with the terms of Assured Guaranty’s insurance policies, and holders of Assured Guaranty-insured Puerto Rico bonds are currently benefiting from their insured bonds’ relative price stability when compared with similar uninsured Puerto Rico obligations.