Assured Guaranty: Einhorn doesn’t get it
Bermudian-based bond insurer Assured Guaranty has hit back after American hedge-fund manager David Einhorn said he was shorting the stock.
Mr Einhorn described Assured as “a melting ice cube that is paying out the drops while it still can” and said his Greenlight Capital hedge fund was betting on its stock to fall.
Assured responded by saying it was clear that Mr Einhorn did not understand its business model.
Assured’s group of companies insure billions of dollars of municipal bonds that are issued by states and city authorities. Its US operating subsidiaries are rated AA by Standard & Poor’s — higher than any other Bermudian insurer — with a stable outlook.
Mr Einhorn pointed to Assured’s exposure to bankrupt Puerto Rico, whose fiscal troubles were exacerbated by Hurricane Maria last year.
“You can’t get blood from a stone, Puerto Rico can only support so much debt,” Mr Einhorn said.
The hedge fund manager, who shot to fame after correctly predicting the collapse of Lehman Brothers ten years ago, months before it happened, said his analysis showed that Assured Guaranty could face $1.5 billion in losses related to Maria. He added that the company had boosted its reserves by a “measly” $111 million.
Puerto Rico might just be the tip of the iceberg of Assured’s problems, he said, adding that the insurer also has some $17 billion in exposure to Illinois.
The bond insurer’s shares fell 6 per cent after Mr Einhorn’s comments on Monday at the Sohn Investment Conference. But since then they have rebounded strongly.
Assured challenged the hedge fund manager’s claims in a statement late on Monday.
“Mr Einhorn’s analysis of Assured Guaranty fails to acknowledge the positive implications of our significant financial strength and strong operating performance, and demonstrates a fundamental lack of understanding of our business model and the municipal debt markets,” Assured stated.
“In the event of a municipal default, Assured Guaranty is obligated to cover shortfalls in scheduled principal and interest payments only when those payments are due.
“Our insurance policies do not permit acceleration of payments without our consent. Mr Einhorn’s focus on total debt service ignores this lack of acceleration, as well as the strength of our balance sheet, and the highly liquid nature of our investment portfolio, which generates significant investment income over time.
“Furthermore, Assured Guaranty is well reserved for its municipal exposures and, due to the non-acceleration feature, does not face liquidity risks.
“We have $11.5 billion of cash and investments with $2.8 billion of estimated excess capital over S&P’s AAA level [as of the end of 2017].
“In addition, we have strong legal rights, including for Puerto Rico under Promesa, which requires that fiscal plans must respect contractual liens and constitutional priorities established under Commonwealth law.”
The statement gave examples of how Assured had mitigated losses and defended its legal rights in other distressed municipal situations — in Jefferson County, Alabama; Stockton, California; Hartford, Connecticut, Detroit, Michigan; and Harrisburg, Pennsylvania.
“For all these reasons and others, we strongly disagree with Mr Einhorn’s assertions. We remain focused on continuing to generate long-term value for our shareholders,” Assured added.
Mr Einhorn may have predicted Lehman’s collapse, but his track record shorting stocks is far from flawless. Last year, for example he shorted Amazon, which rose 56 per cent during the year, as well as Netflix, which rose 55 per cent and Tesla, which gained 46 per cent.
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