The Puerto Rican problem – resolved

Back in the mists of time… possibly before many IJGlobal subscribers had even launched their careers… monolines played a hugely significant role in the financing of big-ticket infra.

Prior to the Global Financial Crisis, received wisdom had it that all the chunkiest projects in the infra space would go down the capital markets route with a monoline wrap.

That was the way of the world and monoliners were loving life. If memory serves, there were 8 of them at the height of the market: MBIA, Ambac, Assured Guaranty, FSA, XLCA, FGIC, CIFG and Radian.

Then along came the sub-prime crisis and the resulting GFC… and the wheels fell off monolines in rather spectacular style.

Back in 2010 – when the monoline fan was well-and-truly clogged – the banking community chortled heartily at their demise… until realising the full extent of their own institution’s exposure to sub-prime, and then all laughter stopped.

Bad times to be working… worse times not to be working.

The GFC put paid to many promising careers as deal originators who clung on to jobs evolved into portfolio managers, but then were caught in the juxtaposition once things started to pick up as they were no longer deemed front-line executers… and a new wave of originators slotted in. But that’s another story for another day – and possibly too painful to revisit.

Bringing it back to subject, this Friday Editorial’s getting a bit misty eyed. Why are we focusing on monolines when there’s only one of them – Assured Guaranty – left writing new paper in Europe?

For the record, there is one other monoline in the US doing the municipal bonds – Build America Mutual (BAM) – while AG has either acquired the other monolines or reinsured others’ books, effectively owning the risk. Some of the others still exist, but are not investment grade… and, as such, cannot write new business.

At IJ, we analysed the demise of the monolines over the couple of years after the GFC kicked in, then tracked the death throes, peeked between fingers at an attempted revival… and then admired Assured Guaranty as the lonely survivor.

Assured Guaranty’s slow return to business and carving a niche has been inspiring and painful to watch in equal proportions. Nick Proud and Dominic Nathan in 2017 built out the team with Ashish Anand and Suprana Dar, joining the team that had weathered the storm. It currently numbers 10.

One year ago (almost to the day), Assured Guaranty (Europe) SA (AGE) and Assured Guaranty UK Limited (AGUK) sponsored a Brexit Report published by IJ. The headline piece was an interview with Raphael de Tapol who heads the AGE team in Paris and gives a good view of how they have reinvented and returned.

This week Moody’s Investors Service upgraded from A2 to A1 the insurance financial strength ratings of Assured Guaranty Municipal Corp (AGM) and its subsidiary Assured Guaranty UK Limited (AGUK)… outlook stable.

Blimey, that’s really quite something… and it all pivoted on resolving the Puerto Rico problem.

Puerto Rican closure

Moody’s rating action report cites its upgrade rationale for Assured Guaranty and its subsidiaries to reflect “improved credit profiles following the resolution of the group’s exposure to the general obligation bonds issued by the Commonwealth of Puerto Rico” and “limited expected volatility among its remaining Puerto Rico exposures”.

It states: “Demand for financial guaranty insurance continues to trend favourably, both in the US and Europe, which supports the continued alignment of interests between Assured Guaranty’s shareholders and its policyholders and creditors.”

Moody’s cited AGM’s “strong capital profile, conservative underwriting of US municipal and international infrastructure finance risks and leading market position in the financial guaranty sector… AGM’s ability to organically generate significant capital through premium and investment earnings make its credit profile resilient to a broad range of stress scenarios.”

Dominic Frederico, president and chief executive of Assured Guaranty, responded: “With the cloud of our Puerto Rico exposure largely lifted and the capital markets experiencing increased volatility and rising interest rates, AGM is poised to continue growing its insured portfolio to sustain and increase its store of unearned premiums, its future earnings power and its financial strength.”

What’s it all about?

Puerto Rico was pivotal for AG to secure an upgrade as this was the one remaining area where it was paying claims, having guaranteed a number of bonds for a range of government agencies.

The Puerto Rican issue had been rumbling along for years, and sources say that AG had always been confident that it would be resolved… but it remained a dark cloud having over the organisation – an exposure of several billion dollars tied up in litigation.

This has – for the most part – been resolved and a line has been drawn under what AG has to pay. IJ hears that a deal has been agreed with bondholders, giving clarity on its exposure… for which sources say the monoline is comfortably over-reserved.

This development sent Moody’s – and indeed AG’s shareholders (the share price bounced) – a positive signal as it removed uncertainty from the equation.

For those who have forgotten (or never knew) how monolines operate, they are paid right up at the front… so this upgrade impacts the bonds, increasing the value as they are better rated – essentially a market benefit to the bondholders.

The upgrade bodes well for AG’s future as it opens new avenues, but the good old Tripe A status it used to enjoy remains an unattainable target.

S&P, for example, has put in place a test to achieve AAA status that is impossible for a monoline to pass, locking AG into AA territory for all time.

Moody’s has done something similar, trapping AG in A territory – but now at the upper end of that scale. The rater set the monoline a target of a certain level of revenue from the 15% insured US muni bond market which is – frankly – unattainable.

But for now, the time has arrived to tip a hat to Assured Guaranty. It’s been a hell of a slog in a hugely unkind market, but – by jiminy – they’ve bloody-well done it and we look forward to seeing them in the future on more than just university accommodation deals and wrapping portfolios of European renewable energy assets.