The Long and Short
Good value in Assured Guaranty’s new notes
Dan Bruzzo, CFA | August 18, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Assured Guaranty (AGO: Baa1/A) recently priced a new 5-year note, the company’s first trip to the public debt market since 2021. The bonds launched at 185 bp over the Treasury curve. They have subsequently tightened by about 20 bp and are currently indicated in the neighborhood of 160 bp to 165 bp over the curve. Even at this tighter level, the new notes could outperform by at least another 20 bp before settling at what looks like fair value.
For index purposes, AGO is classified as a Property & Casualty index exposure but with a significantly different overall risk profile from the traditional A/BBB-rated P&C underwriters in their peer group (see below). AGO boasts competitive strength as one of the few remaining operators in their sector. Despite its troubled past, new issue public finance (which makes up approximately 77% of the portfolio) presents a very stable and captive core business for AGO. The company appears well capitalized for its ratings, with a well-funded portfolio.
Exhibit 1. P&C Peer Group (BBB+ ratings or higher)
AGO New Issue 5-yr Note:
AGO 6.125% 09/15/2028 @ +160-165/5yr, G+162.5, 6.05%, $100.30
Issuer: Assured Guaranty US Holding (AGO)
Amount Outstanding: $350 million (index eligible)
Security Rank: Senior Unsecured
Ratings: Moody’s – Baa1 / S&P – A
The new 2028 bonds are issued out of Assured Guaranty US Holding intermediate holding company, which is fully and unconditionally guaranteed by the ultimate parent company Assured Guaranty Ltd (AGO).
AGO will use the proceeds of the new deal to redeem $330 million of debt maturing in 2024, with the remainder going to general corporate purposes. In recent years, AGO has been terming out its upcoming maturities opportunistically to help improve the company’s overall liquidity profile. After resolving the 2024 maturity, AGO has no public debt maturities until the new 2028 maturity, followed by 2031 ($500 million). As of second-quarter 2023, AGO parent has $114 million in cash and equivalents on the balance sheet but has previously reported over $500 million available at the intermediate holding company.
As it relates to the Puerto Rican debt crisis, it appears a lot of the uncertainty is now contained and that AGO’s exposure remains very manageable. A Restructuring Support Agreement (RSA) was struck with the Puerto Rico Electric Power Authority (PREPA) in 2019, which appears to have mitigated a lot of the original risk. Risks were then further mitigated last year with the resolution of both general obligations (GO) and GO-backed obligations. The most significant obligation remaining is associated with PREPA and is estimated to be less than $1 billion, versus double-digit billions in claims paying ability (north of $10 billion). Meanwhile, AGO reported as of second quarter 2023 that total remaining exposure to Puerto Rico was down to $1.35 billion according to scheduled net par amortization of exposure and $1.83 billion according to scheduled net debt service amortization of exposure.
To reflect the progress made last year, AGO had its senior debt rating upgraded to Baa1 from Baa2 by Moody’s and had the insurance financial strength rating of Assured Guaranty Corp raised to A2 from A3, while the IFS rating at Assured Guaranty Municipal Corp was raised to A1 from A2. In addition, S&P affirmed the senior debt rating at A and the IFS ratings at AA and left the outlook at Stable. Moody’s cited “the resolution of the group’s exposure to the general obligation bonds issued by the Commonwealth of Puerto Rico and limited expected volatility among its remaining Puerto Rico exposures.” The rating agency also highlighted the strong capital positions of both of the operating companies. In their affirmation of the ratings, S&P also noted the strong capital and “exceptional” liquidity at the opcos.
AGO had seen some slight downward rating migration in their insurance-wrapped portfolio throughout the depths of the pandemic, but nothing that materially impacted their financial risk profile. Guarantees are only triggered by defaults, not ratings downgrades, so even that extreme environment did not result in materially heightened payouts for the company.
Potential mergers with part, or all, of either MBIA Inc (MBI: Ba3/NR) and/or Ambac Financial (AMBC: NR) have been an ongoing credit concern with the further resolutions of Puerto Rican debt exposure throughout the industry. However, MBI recently announced that they were taking a pause from actively pursuing strategic options, including a sale, which has cooled some of that speculation. While a deal with either entity would likely result in some form of debt issuance/cash funding, potential total credit impact appears that it would be manageable. MBI has a market cap of under $450 million as of last quarter and a total enterprise value of less than $3.5 billion. AMBC has a market cap of just under $620 million with an enterprise value of under $1.2 billion. Those compare with AGO’s market cap just under $3.5 billion and total enterprise value of a little under $5.3 billion as of the second quarter.
While AGO’s commitment to shareholder remuneration somewhat limits upside to the credit, management has struck a balance between compensating shareholders and maintaining solid credit metrics. Since 2013, AGO has repurchased over 70% of shares for approximately $4.7 billion. In the first half of this year, management has purchased $26 million in shares, with another $158 million authorized as of this month.