In June Congress passed and President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (“Promesa”) in attempt to address Puerto Rico’s debt problem. No one would argue that it is a perfect piece of legislation but it is nonetheless a genuine effort to create a viable restructuring mechanism, including a stay for (most) litigation and debt service requirements. Perhaps the most important component is a seven-person control board with significant powers over debt negotiations and fiscal and budgetary matters. The members of the control board have yet to be appointed, but I believe there is some reason for hope on this front. Puerto Rico defaulted on a large portion of its financial obligations due July 1st – an inevitable outcome regardless of Promesa – and Promesa does not, of course, fix the underlying problems in Puerto Rico’s sclerotic economy. Only time will tell if Promesa is the beginning of a meaningful restructuring that can foment a sustained recovery in the economy. There is still a long road ahead in any case.
Assured (AGO) and Ambac (AMBC) continued much as they have in recent quarters and there was little change in their size as a share of our capital during the quarter. AGO remains one of our four largest investments while Ambac is far smaller.
Apart from Promesa, AGO participated in the restructuring support agreement for Prepa, the electric utility of Puerto Rico, and the company continues to be active in managing its exposures. AGO also made a meaningful acquisition during the quarter, acquiring CIFG Assurance North America (and its parent CIFG Holding Inc.) for 450 million in cash. The deal closed on July 1st and it is expected to add $5.6 billion of net par to AGO’s insured portfolio along with an increase of $300 to $325 million in Assured’s statutory capital. AGO management also expects it to be accretive to earnings and book value. CIFG’s limited options contributed to what I believe is an attractive price and a good use of AGO’s capital.
Ambac settled a distracting proxy battle in May after countless press releases and filings by both sides. The two new board members, which I discussed last quarter, are settling in and I’m hopeful for an improvement in overall corporate governance. On a less optimistic note, the Countrywide/Bank of America litigation is still pending, with no end in sight.
The above commentary is excerpted from the 2Q16 quarterly letter of Anabatic Investment Partners LLC. The fund’s Managing Principal and Portfolio Manager is Philip C. Ordway. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.
Gross Long and Gross Short performance attribution for the month and year-to-date periods is based on internal calculations of gross trading profits and losses (net of trading costs), excluding management fees/incentive allocation, borrowing costs or other fund expenses. Net Return for the month is based on the determination of the fund’s third-party administrator of month-end net asset value for the referenced time period, and is net of all such management fees/incentive allocation, borrowing costs and other fund expenses. Net Return presented above for periods longer than one month represents the geometric average of the monthly net returns during the applicable period, including the Net Return for the month referenced herein. An investor’s individual Net Return for the referenced time period(s) may differ based upon, among other things, date of investment. In the event of any discrepancy between the Net Return contained herein and the information on an investor’s monthly account statement, the information contained in such monthly account statement shall govern. All such calculations are unaudited and subject to further review and change. For purposes of the foregoing, the calculation of Exposure Value includes: (i) for equities, market value, and (ii) for equity options, delta-adjusted notional value.
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