Sunday, June 9, 2013

Fun Facts on the JeffCo Agreeement

While less interesting than the Red Wedding, there is plenty of entertaining tidbits in the 336 page finale to the Jefferson County debacle. Here is what stood out to us:

1) Insurers will essentially pay no further claims. Assured will be compensated for all payments it makes and the vast majority of all other insured warrant holders must commute their exposure, or else there is no deal. With $2.4B of warrant holders contractually obligated to support the deal, the commutations will or should happen. We don't know if the plan will force all non-Assured warrants to commute though it seems that it will. Ambac did force a commutation settlement of all its Las Vegas Monorail exposure several years ago. It is also possible that all FGIC ($1.4B) and Syncora ($700M) wrapped paper is embedded in that $2.4B. But for other warrant holders, the commutation election is independent of voting for the plan of reorganization.

2) The 20% haircut to warrant holders is well within the opportunity and legal costs of duking it out with the county, so this does not diminish the standing of the rate covenant or net revenue pledge. Most warrant holders are earning only two times LIBOR on a junk credit, the 20% they are losing out on can be earned back elsewhere in four or five years.

3) The $165M payment to insurers is not enough to make them whole in settlement of $335M of certain warrants that they own (non-2013 warrants). Pay close attention: the payment is made to the insurers collectively and not simply 49% of each warrant. It makes the most sense for this payment to be divvied up not based on the warrants owned, but for the losses on these warrants to be in proportion to each insurers total exposure. This would fit intuitively with industry commutation practices. For example, if each insurer took a 5% loss on total exposure that would work out to losses on direct exposure of: Assured - $10M; Syncora: $50M; FGIC - $75M. Golly, it looks like the losses were just north of 5%, and in exchange the insurers will no longer incur significant legal costs. This is well within even FGIC's reserves, which we believe are the lowest (for example, lower dollars reserved than Syncora despite having more net exposure.)

4) The language in the agreement does not seem to absolutely disallow additional outside agreements between the parties, but this is our lowest confidence read. An outside agreement would allow councilmen to campaign on having made all of Wall St. bend the knee when perhaps all the payments are ultimately coming from JP Morgan's pocket.

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