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Kroll Bond Rating Agency Comments on KBRA-Rated Bond Insurers' Exposure to Puerto RicoKroll Bond Rating Agency (KBRA) notes that the bond insurers' exposure to Puerto Rico has been the focus of heightened market interest over the past week due largely to the recent comments made by officials of Puerto Rico, especially Governor Padilla's call for a debt moratorium.1 KBRA rates two bond insurers with exposure to Puerto Rico: Assured Guaranty Municipal (AGM), rated AA+ Stable Outlook, and National Public Finance Guarantee (National), also rated AA+ Stable Outlook.2 KBRA's ratings of AGM and National are insurance financial strength ratings reflecting the policy holder obligations of each company. KBRA's prior rating analyses of AGM and National incorporated a stress case analysis of their respective exposures to Puerto Rico that assumed significant losses on all classes of insured Puerto Rico debt except for insured COFINA debt. It also assumed that certain reinsurers fail to perform on their reinsurance obligations to the ceding company. As described in our reports for AGM and National, these assumed losses totaled nearly $800 million for AGM and nearly $1.4 billion for National on a future value basis over the terms of the insured debt as they mature over the next 20+ years. For AGM, these stress case losses constitute 40% of the $2.0 billion of net par exposure to the Puerto Rico issuers subject to the stress case. For National, they represent 38% of their $3.7 billion of net par exposure to the stressed issuers.3 Further, KBRA incorporated these Puerto Rico stress case losses, together with other stress case losses from the balance of their respective insured portfolios and operating expenses, in our financial model forecast of each company. The results of this financial model showed their respective claims paying resources sufficient to meet all requirements by a comfortable margin. KBRA further notes that AGM and National, among others, are facilitating the cash flow requirements of PREPA by committing to purchase a substantial proportion of $128 million of short term financing. This financing, in KBRA's opinion, reflects the stressed condition of PREPA. In KBRA's opinion, these recent developments with respect to Puerto Rico have not progressed to a point that exceeds the level of stress we have previously incorporated in the rating analysis of AGM and National. KBRA will closely monitor future developments. Although we developed these stress case losses based on assumptions that we expect will be more severe than the actual outcome, we cannot be certain that will prove to be the case as the process unfolds. As the Puerto Rico credit profile evolves, KBRA will comment on any changes that are warranted in our analysis.
About Kroll Bond Rating Agency KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).
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