Bond insurers Assured Guaranty Ltd. (NYSE:AGO) and MBIA (NYSE:MBI) are trading lower by 12% and 16%, respectively, on news that Puerto Rico may be unable to satisfy its bond obligations.

The New York Times reported on Sunday that Puerto Rico's governor, Alejandro García Padilla, said that "the debt is not payable" and that "this is not politics, this is math."

So what
Assured Guaranty and MBIA have substantial exposure to Puerto Rico through insurance written on the territory's public debts. MBIA reported in its most recent quarterly filing that it had insured $4.54 billion of Puerto Rican bonds. Assured Guaranty reported having net exposure to Puerto Rico of $4.94 billion.

Now what
The Wall Street Journal reported that analysts suspect the government will run out of cash by July, which would lead to widespread shutdowns. Without the common tools to stave off a debt crisis -- deflating the currency or going through bankruptcy -- many believe the debt will ultimately be restructured. 

A BTIG analyst downgraded Assured Guaranty and MBIA from "buy" to "neutral." In a research note, BTIG pointed out that the losses are difficult to quantify, given that the insurers are exposed to different bonds with differing revenue sources. MBIA's largest exposures are to the island's Electric Power Authority and the Commonwealth's General Obligation issues, according to its filings. Assured Guaranty's largest exposures are to the General Obligation bonds and PRHTA, which is backed by the island's transportation revenue.

A restructuring generally results in different haircuts and concessions for different bonds. Thus we'll have to wait for additional clarity from Puerto Rico as to how it plans to restructure its obligations. The government is expected to make an announcement later today.

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