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MBIA Inc. Message Board

  • peristentone peristentone Jul 9, 2014 12:07 AM Flag

    Can AGO and MBI Refuse to Insure Puerto Rican Debt?

    Isn't there a good legal basis for MBI initiating a suit to withdraw its insurance on Puerto Rican utility bonds? Don't the laws that the Puerto Rican government has passed completely change the risk profile of the insurance? Surely the insurance contract allows the insurer to withdraw its insurance when risk profile is change in bad faith?

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    • In a nutshell, no. Risk profile changes all the time and goes with the territory and doing your due diligence before you insure.

      If there is a default on the insured muni bonds Mbi is contractually obligated to pay up interest and principle. Even if MBI sued to try to limit damages from muni bond default, mbi would still have to make good on it until PR comes out of default and resumes payments (if ever.)

    • Anyone have a legal perspective on this question?

      • 1 Reply to peristentone
      • Do you mean debt that is already issued and insured, or new debt? This is not a legal perspective, but the best thing MBI can do here is ensure that all of the holders of insured PREPA and other insured PR debt are paid on schedule and in full. This would probably do a lot to increase demand for bond insurance, and demand is one of the biggest issues MBI faces right now.

        They can certainly refuse to insure new debt issuances of puerto rico if they wish.

        From a legal perspective, regarding whether they can refuse payment of benefits, you'd have to first look at the policies and understand the terms of coverage. There are probably many legal theories MBI/AGO could investigate to refuse coverage, but can you imagine a worse advertisement for these companies than not paying on defaulted PR bonds?

        Likewise, for PR, a big PREPA default would be a dumb thing to do. This is a country that cannot afford to lose market access for long, and it seems a big default would kill them in this respect. I anticipate something like a default (they have already extended their LOC deadlines once, and are thus arguably there now), but also anticipate a privately negotiated solution to extend/cap interest rates/etc. to give them breathing room to improve PREPA operations and reduce operating costs. The smaller the ultimate haircut for bondholders, the better for both PR and MBI.

        If PR takes advantage of the debt enforcement act, it will be a morass of litigation , and they would lose market access for a longer period of time, which would not benefit them.

    • I was thinking the same thing but didn't know how to explain it so eloquently.

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