Puerto Rico entered its own form of bankruptcy in early May, and the financial crisis there is still getting worse. But even as the restructuring process devolves into more lawsuits, defaults, and downgrades, some ripple effects are creating surprising opportunities for investors, the Wall Street Journal reported yesterday. Consider what’s going on with MBIA, the parent of bond insurer National, which insures about $4 billion in par value of Puerto Rico bonds. (That’s about $8.5 billion in total debt exposure, including all scheduled interest payments and principal.) MBIA’s business plans were torpedoed by a two-notch rating downgrade by S&P Global Ratings in late June. The firm laid off employees and said that it would give up trying to write new business, as bond insurers have to be rated higher than municipalities for the insurance to add any value. Yet MBIA’s shares have been rising ever since. On Tuesday, management told investors to expect shareholder-friendly moves, such as more stock buybacks and perhaps a special dividend—even as it had to increase accounting for losses related to Puerto Rico. Executives say the firm, which has the ability to pay claims equal to $4.6 billion, is now “unshackled from most of the limitations imposed by the rating agencies” by not writing new business.
