MBI MBIA Inc

By Andrew Scurria 

While some investors flee Puerto Rico securities, a major bond insurer is still a buyer.

Ambac Assurance Corp. has been aggressive this year in repurchasing distressed bonds that the company has guaranteed, Chief Executive Claude LeBlanc said on an earnings call last week. The buybacks include municipal debt issued by Puerto Rico, the struggling U.S. territory now under bankruptcy protection.

Repurchasing bonds in the open market allows bond insurers to chip away at problematic exposures, provided the debt is cheap enough. Both Ambac and MBIA Inc. bought back Puerto Rico sales-tax bonds, known as Cofinas, after prices fell when the island's former governor declared its debt unpayable in 2015.

Now Ambac is accelerating its buyback strategy, doubling down last quarter on investments in its own securities, said Odeon Capital Group research analyst Andrew Gadlin.

The company owns 16% of the $7.3 billion in Cofinas it guarantees, Mr. LeBlanc said, up from the $233 million it reported owning last year. The bonds are trading at pennies on the dollar because they pay no interest until their balloon maturity in 2054. Ambac also bought $114 million of its own surplus notes in the first quarter.

Ambac and other insurers made large bets that Puerto Rico would repay its obligations, writing insurance policies in the 2000s promising to cover shortfalls in scheduled debt-service payments. The federal oversight board managing Puerto Rico's finances is now asking a judge to slash its $73 billion debt load, heightening the likelihood of claims on those policies.

Ambac's $9.6 billion exposure to Puerto Rico is one reason the insurer remains under a court-supervised rehabilitation process. Insurance regulators broke up Ambac into a good bank and a bad bank in 2010 to contain the damage from policies written on toxic real-estate securities and credit derivatives.

Seven years later, Ambac's regulator is developing a plan to end the rehabilitation. The more insured debt that Ambac buys back, the easier it will be for the regulator to justify releasing the bad bank from court supervision, and the less likely policyholders at the good bank will object, according to people familiar with the matter.

"The company looks at cash as a strategic resource, and right now the focus of the strategy is to exit rehabilitation," Mr. Gadlin said.

Ending the rehabilitation is a worthy goal, but not if it costs too much, said Evermore Global Advisors LLC CEO David Marcus. Bond buybacks make the most sense during periods of volatility when prices fluctuate and sellers are motivated, but Ambac appears to have bought Puerto Rico bonds at fairly steep prices, Mr. Marcus said, in the months before the U.S. territory's entry into court-supervised restructuring proceedings.

The repurchased Cofina bonds yielded less than 6.1% in the first quarter, according to Electronic Municipal Market Access. Yields and prices move in opposite directions.

Meanwhile, volatility in benchmark Puerto Rico bonds has increased since the May 3 bankruptcy as investors unload them. Ambac bought ahead of the bad news, when insurers are typically more restrained in deploying capital, said Mr. Marcus, whose firm owns Ambac shares.

"You have to wonder if they were paying too much," he said. "Getting to the finish line is one thing, but not if they're throwing gold bars out of their pockets to lighten the load along the way."

Investors with claims against the bad bank have been agitating for accelerated settlement payments, arguing that Ambac can pay them off with new debt and the proceeds from pending lawsuits against Bank of America, people familiar with the matter said. A New York appeals court on Tuesday allowed some of the claims against Bank of America to proceed.

Puerto Rico, its creditors and the oversight board are scheduled to meet in court for the first time Wednesday before U.S. District Judge Laura Taylor Swain, who is handling the bankruptcy proceedings. While no Puerto Rico bonds have been restructured yet, Ambac has paid out $78 million in claims for missed payments so far and has set aside reserves as a cushion against further losses.

Complicating matters, it may be harder for the insurer to reach consensual settlements than for other creditors with more narrow interests. Hedge funds bought uninsured Puerto Rico bonds to bet on specific tranches of debt, but Ambac, MBIA and Assured Guaranty Ltd. are jointly liable with Puerto Rico on a variety of competing bonds.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

May 16, 2017 16:55 ET (20:55 GMT)

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