| SAN FRANCISCO, June 29
SAN FRANCISCO, June 29 Shares of banks and bond
insurers exposed to Puerto Rico plummeted on Monday due to
growing fears the U.S. Commonwealth would default on its debts,
and options activity on many of those shares hinted at further
declines to come.
Bond insurers were hit the hardest. Assured Guaranty
shares fell 15.8 percent while MBIA Inc fell 21 percent.
Ambac Financial Group dropped 11 percent. All three
have sold insurance against potential defaults of Puerto Rican
Retail banks operating in Puerto Rico also suffered. Popular
Inc was down 10 percent; OFG Bancorp fell 14
percent and First Bancorp was down 13 percent.
Puerto Rico faces crunch time this week with a June 30
deadline to restructure some of its debt or bump the deadline.
Over the last day, former IMF staffers issued a damning report
about the U.S. Commonwealth's financial stability and Governor
Alejandro Garcia Padilla told The New York Times the island's
debts were not payable and that creditors would probably have to
take significant concessions. Padilla had previously rejected
the possibility of default.
"The uncertainty created by the reversal of (Padilla's)
stance makes the bond insurer stocks unbuyable until clarity
around the situation develops and the magnitude of the losses
the insurers stand to realize becomes more apparent," brokerage
BTIG said. It downgraded Assured Guaranty and MBIA to "neutral"
Up to Friday's close, MBIA's shares had fallen 13 percent
this year, while Assured Guaranty's shares had gained 5.5
percent and Ambac had lost 8 percent.
About 4.2 percent of Assured Guaranty's shares were sold
short in mid-June, up from 3.6 percent at the end of May. Close
to 4.7 percent of MBIA's shares were short sold in mid-June.
Options volume on Assured Guaranty soared to 79,000
contracts, or 22 times normal, boosted by a hefty put spread
where a trader appears to be rolling a large position in January
puts down five strikes from $25 to $20.
If so, the trade could be hinting at concerns about
additional losses in the stock through the second half of 2015.
Options activity in bond insurers Assured Guaranty
and MBIA Inc ballooned to several times normal.
Investors, who may have been long credit and used equity
options on MBIA to hedge the downside, appeared to be closing
some of those hedges for gains, Jim Strugger, derivatives
strategist at MKM Partners, said.
For MBIA, options volume was at 36,000 contracts, or 9 times
the average volume. Puts betting on the shares dipping below $7
by mid-August were the busiest, with volume of about 8,500
contracts traded, according to Trade Alert, an options analytics
A Puerto Rican default would stress the balance sheets of
bond insurance sellers, said Andrew Gadlin, an analyst at Odeon
Capital Group who covers Ambac.
"But given that this is one big event, as opposed to
multiple events coming from all sides, they will all be able to
get past it," Gadlin said.
(Reporting by Noel Randewich, additional reporting by Saqib
Ahmed; Editing by Chizu Nomiyama)