RP, one nice thing here is that Warburg Pincus still owns a very big chunk of this company purchased at higher prices, and they have representation on the BOD. Also, Jay Brown has plenty of incentive to increase the pps. As such, i think we will see some shareholder-friendly actions regarding cash provided by National to the holding company.
Dividends will come from capital generated by the continued runoff of the National portfolio, to the extent that the capital is not used to back new business. Thus, at least some of the dividend amount doesn't arise from current operating cash flow, but rather prior retained earnings.
According to a comment posted today by Mark Palmer of BTIG, MBI management stated in a recent meeting with BTIG that an upcoming dividend could be as big as $220mm.
With this dividend, plus the tax escrow release of $228mm that is likely coming in early 2015, and plus current liquidity of $365mm, the holding company could have plenty of cash on hand in the near future to use in a new buyback program.
His price target dropped from $20 or so down to $12, as he's assigning a lesser multiple to the BV of the company minus the structured finance unit. Probably gets hard to stick your neck out on a high price target for as long as he previously did.
Updated article states that a condition of the extension may be the appointment by the banks of a chief restructuring officer at PREPA.
It is my understanding that power costs are already high due to a fuel surcharge added to power bills, and the high power costs are impeding economic development (companies won't build factories there if the power to run them costs too much). Thus, even though rates have been flat, fuel costs (due to the use of oil to produce power), and thus power bills, have risen a lot over the years.
Of course, a fuel surcharge doesn't help to fund other operating costs, and i'm sure those costs have risen too. Thus, a rate increase is probably in order, in combination with some fat trimming, though the government will be extremely loathe to do it.
It would be a huge help if the government and the other public corporations would just pay their power bills...
There are a lot of parties at interest here, so i don't know how the debt will be restructured - a lot of things could happen.
I do think that the Debt Enforcement and Recovery Act will be held unconstitutional eventually, which will take away PR's stick in its restructuring efforts. In addition to the supremacy clause/preemption/contract clause/takings/etc. issues that are getting the attention, there is some other crazy stuff in there - for example, the act purports to allow PR local courts to stay federal court litigation. This just can't withstand scrutiny.
It's uncertain whether the efforts to amend the US Bankruptcy statute to grant PR access to ch. 9 will succeed, but that would be better than the Recovery Act.
I also think that changes will be made at PREPA to keep access to credit and strike a deal with bondholders. All of the options in the Franklin and Bluemountain complaints seem feasible, especially changing how the contributions in lieu of taxes provision is applied. Otherwise, they default, have to make changes anyway because they have no $$, plus lose their access to capital markets for a long long time. It just makes sense to strike a deal with the bondholders and insurers that is not overly punitive. Back in early July, AGO's management estimated a 20% haircut as a worst-case scenario, and possibly no haircut. Not sure if that is the current feeling, but they'd know better than me.
Ted Olson represents Bluemountain against Puerto Rico in this case. The amended complaint is great reading. It will be interesting to see if they file a summary judgment motion early in the proceedings, similar to Franklin/Oppenheimer. Either way, we are in for a show.
There were more options listed - i tried several times to post part II, but for some reason couldn't do it. I'll try again tonight.
No doubt we are taking today due to the next line of credit deadline being this Thursday. The banks will probably give PREPA another extension at a higher interest rate.
It's a safe bet that the mutual funds and bond insurers are in contact and have collaborated on defenses. Thus, i think this amended complaint gives a good picture of their collective position on operating improvements.
The mutual funds also filed for summary judgment today - a very good and aggressive strategy this early in the matter. Whether the motion is considered will depend upon whether the case is considered ripe (i.e. can go forward based solely upon the existence of the new law , and not the application of the law to any specific application of it). I'm guessing it will go forward, but good firms will be presenting good arguments on both sides, so you never know. If not, then we'll have to wait for PREPA to file for relief under the law, then wait through a much longer legal process (at least through new pleadings, discovery and SJ motions).
Thus, let's hope the summary judgment motion is decided.
Many other alternative methods are available to the Defendants to achieve the
Recovery Act’s stated goals, including:
i. Adjusting PREPA’s rate structure (i.e., raising rates) to support the costs of
providing electricity to Puerto Rico, as authorized by Section 502 of the Trust
Agreement. Despite this authorization, PREPA has not raised basic electric rates
for over 25 years, with the last reported rate increase occurring in 1989.
ii. Collecting the over $640.83 million currently owed to PREPA by the
Commonwealth (not accounting for $420.57 million the Commonwealth claims it
is owed from previously accrued contributions in lieu of taxes).
iii. Reducing the amount of funds currently diverted to subsidies and other
municipalities. PREPA, as a public corporation, is exempt from taxation. See
PREPA Act § 22. The PREPA Act, however, requires it to set aside 11% of its
gross revenues each year to pay “contributions in lieu of taxes” (“CILT
payments”) to municipalities and other subsidies, including hotels, residential
consumers, and others. Id. These contributions, which are expected to total
almost $1 billion from 2014 to 2018, could be reduced without impairing
PREPA’s contractual obligations to holders of PREPA Bonds.
iv. Giving priority to payments to PREPA Bonds over subsidy and CILT payments.
Historically, the PREPA Act gave payments due on the PREPA Bonds priority
over subsidy and CILT payments. See PREPA Act § 22. Nevertheless, in
practice, PREPA allowed recipients of subsidy and CILT payments to reduce their
electric payments by the amount of the subsidy or CILT payment, essentially
giving such recipients priority of payment over holders of PREPA Bonds.
Sounds like management is planning on doing more buybacks if the stock price stays low. As old business runs off and new business remains non-existent, more and more capital is freed up for buybacks, and management has recently stated that they'd rather return the capital to shareholders than write low-priced business. I'd be fine with the price down here for a bit longer if they are going to keep buying back shares.
Some more interesting details are leaking out - search for "Puerto Rico power authority weighs financing options as bank deadline nears."
Line of credit extension for PREPA expires tomorrow. We'll see if PREPA defaults. If not this time, it will have other opportunities soon. Search for "Puerto Rico Power Authority Faces Critical Financial Deadline Thursday" to find a relevant WSJ article.
RP et al.,
I still read this board, but i sold all my position after the last earnings release, so i'm off the cheerleading squad now. Once we were above 16, we were fairly priced IMO. I got out at an average of around 17.65. Missed the 18s, but anything above 16 was gravy in my book. Now playing around in MBI and researching some others. Puerto Rico is really keeping MBI down right now, possibly for good reason, but fear creates the best opportunities.
I'd probably buy back in here if we hit the 14s again. Also, i plan on buying a basket of insurers at some point before interest rates rise - they should do well in a slowly rising environment.
Good luck to all. LTC looks like it is going to be a challenge here for awhile longer.
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.
Hi RP - nice to see another GNW alum here. There's certainly lots of headline risk here for the near term - litigation around the new PR "bankruptcy" law, further downgrades of PREPA/PRASA/other bonds, etc. However, National's muni portfolio is much bigger than PR, and all of this chaos will sort itself out in a matter of months.
Looking at the bigger picture, events like PR's actions this week are exactly why MBI and AGO are in business. Holders of insured PREPA bonds are counting their blessings, and in the long run, if the bond insurers can help secure a good outcome a la Detroit, this event will increase demand for their wraps, which is good for shareholders.
Mark Palmer's downgrade today is surprising, as MBI is cheap under his prior reasoning even with the current PR issues. It seems that he's just saying that it's hard to value this company quantitatively when the legal framework around one of its key liabilities is changing daily. I agree with that, but it seems AGO suffers the same issues.
On another note, National will be running off 15-20B or so of coverage each year going forward, and they won't be able to write enough new insurance to replace it, so they'll be freeing up a good amount of capital (200M or so annually as a SWAG) that can be used to pay down debt and maybe do a dividend down the road. Thus, i think there is value here and am holding for the 17-18 price range.
All things considered, today could have been way worse for longs. Of course, there is always tomorrow.