Earnings Call
Assured Guaranty Ltd (AGO)
Earnings Call Transcript - AGO Q2 2020
Operator, Operator
Good day and welcome to the Assured Guaranty Limited Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations. Please go ahead.
Robert Tucker, Senior Managing Director, Investor Relations
Thank you all for joining Assured Guaranty for our second quarter 2020 financial results conference call. Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change with new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you are listening to a replay of this call or if you are reading a transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings, and for the risk factors. The presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures and our current financial supplement and equity investor presentation, which is on our website at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you would like to ask a question. I will now turn the call over to Dominic.
Dominic Frederico, President and CEO
Thank you, Robert, and welcome to everyone joining today's call. For the first time in our history, Assured Guaranty's adjusted book value has surpassed $100 per share and both shareholders' equity per share and adjusted operating shareholders' equity per share were also new records. We achieved this milestone while producing our best direct new business insurance production for the second quarter since the acquisition of AGM in July of 2009. Our financial guaranty, guaranty PVP of $96 million was 71% higher than in last year's second quarter. Our success reflects the tremendous work we did over several years to prepare for the unexpected. Our people were extremely effective, operating 100% remotely in unprecedented economic and market conditions. We had the technology, processes, and training in place to help us excel during this pandemic, and we did excel, proving again not only the competence and dedication of our employees but also the resilience of our business model and the benefits of our value proposition. With the virus creating market and economic uncertainty, bond yields increased by the beginning of the quarter and credit spreads widened. Investors turned more of their attention to credit quality for which our financial guaranty insurance is a solution and also to ratings durability, trading value stability, and market liquidity, all of which our product tends to add value. The result has manifested in heightened demand for bond insurance. As a result, we saw the best second quarter and first half direct U.S. public finance production in more than a decade, driving direct PVP of $60 million and $89 million, respectively. I can tell you that with our July municipal insured par volume exceeding $2 billion, the surge in demand for our guaranty has not let up. At the industry level, more than $9.1 billion of U.S. public finance primary market par was sold with bond insurance in the second quarter, the most for any quarter since mid-2009, and industry insurance penetration reached 8.7% of total new issue par sold, the highest quarterly level since 2009. Six months' industry insured volume is 43% higher than in the first six months of 2019. In this strengthened municipal bond insurance market, Assured Guaranty was selected to ensure 63% of the insured new issue par sold in the second quarter. Compared with the second quarter of last year, Assured Guaranty's primary market production was up 58% to $5.8 billion in insured par sold and up 22% to 318 new issue in transaction count. The heightened par volume was partly driven by large transactions, but we continue to be the insurer of choice. We insured large tax-exempt and taxable deals across a variety of sectors and underlying rating categories, including, for example, AA healthcare issues and AA general obligations. We guaranteed 11 transactions of over $100 million in insured par during the quarter, the largest of which was a $385 million school district transaction with the Dormitory Authority of the State of New York, rated AA3 by Moody's and AA- by Fitch. The high value that investors place in our guaranty was visible among credits with underlying S&P or Moody's ratings in the AA category, where we insured more than $1 billion of primary market par in the second quarter. We are also seeing heightened demand for our secondary market insurance. During the second quarter, we insured $533 million of secondary market par compared with $233 million for the first quarter of the year and $327 million for the second quarter of 2019. In aggregate for the primary and secondary markets, Assured Guaranty provided insurance on $6.3 billion of municipal bonds, 58% more than in last year's second quarter. Although by quarter end, municipal yields have trended close to historical lows seen in March, credit spreads generally remain wider than the pre-pandemic levels, and that is one reason, along with very strong issuance volume, for the successful performance we are seeing. We also had a great second quarter in our international infrastructure business, where we generated $28 million of direct PVP, over three times last year's second quarter PVP and the second highest quarterly direct PVP in the sector since before the Great Recession. Notable transactions included our third solar bond wrap in Spain, the modification of terms of an existing investment-grade insured transaction to provide additional flexibility to the issuer and a secondary market guarantee to a European financial institution for a public sector credit. The impact of COVID-19 has been mixed for the international business. On one hand, fewer transactions are coming through, especially in transport and social infrastructure, and some transactions in our pipeline have been delayed, though nine have been canceled. On the other hand, credit spreads widened materially, which have not returned to the previous tighter levels, which increases the value of our guarantees. We continue to see an increased variety of incoming new transaction inquiries, some of which are a direct result of COVID-related investor concerns. Our global structured finance business also performed well in the second quarter, contributing $8 million of PVP from a variety of transactions, including an insurance securitization and two whole business securitizations. The pandemic has slowed both asset-backed issuance and the progress in some of our transactions and development, but it has also widened credit spreads and created new opportunities. We are seeing an increased number of investor-led opportunities relating to portfolios of corporate credit exposure. On our last call, I explained in detail that our insured portfolio is in good shape to weather this economic disruption. We have continued our due diligence and reached out to almost all the obligors we identified in the vulnerable section to learn how they plan to manage their resources. Based on our research and the additional information provided by obligors, we continue to expect no material pandemic-related liquidity claims. To date, we have not been asked by any financial guarantee claims that we attribute to the COVID-19 pandemic. For below-investment grade insured obligations, which we have identified as already under stress, we have updated our assumptions to take into account the added stress of the pandemic. We continue to believe that for the remainder of the portfolio, the 96% of par exposure that is investment grade, there should be no material losses caused by the pandemic. In any case, as I said before, we have proven the resilience of our business model. For example, from 2008 through the second quarter of 2020, we paid $11 billion in gross claims, $5 billion in net, and returned more than $4.3 billion to shareholders through share repurchases and dividends. Yet our claim-paying resources were virtually the same at the end of the period compared with the beginning. Meanwhile, we have dramatically reduced our total par exposure and cut our insured leverage by more than half, measured by a variety of ratios. We are in better shape today than before the Great Recession. I hope you will take a look at the two reports S&P published since the pandemic began. I mentioned one on our last call, S&P's April 3rd report on the bond insurance industry. The second was S&P's annual review of Assured Guaranty that came out on July 16th. The common theme of these reports was that, notwithstanding the current macroeconomic environment, S&P assesses the risk profile to be low for both the bond insurers as an industry and for Assured Guaranty, a very positive conclusion. S&P affirmed the ratings of all our insurance units at AA with a stable outlook in June. In the annual review that followed, S&P reiterated how our strong capital position, exceptional liquidity, and proven business model support our financial strength rating. Additionally, S&P recognized the increased demand for Assured Guaranty's products since the spread of COVID-19, writing that investors' flight to quality and wider credit spreads should continue to provide us with primary and secondary market underwriting opportunities. In U.S. public finance, it attributed the strong secondary market demand we've experienced to institutional investors finding the economics of bond insurance appealing as a tool for risk mitigation. In the same report, S&P ran a COVID-19 sensitivity stress test, and even under the increased loss assumptions in that scenario, our capital adequacy assessment would still be excellent. S&P also described our financial risk profile as very strong and stated that during periods of economic stress, our insured exposures outperform relative to the market segments in which we underwrite, due to our underwriting and risk management guidelines. S&P does not publish a figure for our excess capital under their AAA depression stress model. We estimate that we have $2.6 billion of capital in excess of S&P's AAA requirement as of year-end 2019. This incorporates the impact of our capital management program, the acquisition of BlueMountain, our elimination of an excess of loss credit facility, and the continued payment of Puerto Rico debt service claims. Another report I was reading was issued by Kroll Bond Rating Agency on July 30th. They provided a detailed discussion of the recent increased activity and demand for bond insurance. In the report, KBRA also makes a positive observation that it believes the pandemic should remain largely a liquidity event for bond insurers, with the exception of Puerto Rico. On the subject of Puerto Rico, we continue to pursue a consensual resolution of the situation while defending our rights in the Title III bankruptcies. COVID-19 and the pending gubernatorial election may be slowing progress somewhat. In recent news, PREPA hired a private U.S.-Canadian consortium to operate its electricity transmission and distribution system. This appears on the face to be a step in the right direction, but the essential step to restore and improve the power system is to complete the restructuring support agreement that all appropriate parties have agreed to. We agree with the Oversight Board that as long as PREPA remains in Title III, the utility will not have effective access to capital markets to fund the critical grid modernization and improvement plans. The Title III Court refused to lift the stay on our ability to assert our property rights with respect to Highway and Transportation Authority Revenue bonds. We will appeal this ruling. At least two members of the Oversight Board announced their imminent resignation and all members are subject to replacement or renomination. We hope congressional leadership and the President choose Board members more familiar with municipal government and finance. Lastly, supply chain management has become a significant issue on Capitol Hill, creating an opportunity for legislation that could allow the country to take full advantage of Puerto Rico's long history and well-established capabilities in the production of pharmaceuticals and medical supplies to medical devices. This would solve the current public health crisis and improve the nation's security and preparedness for the future while at the same time reviving a key portion of the island's manufacturing base and providing impetus to its economic recovery. Coming from the financial guaranty business to asset management, Assured Investment Management benefited from a strong rally in the credit markets during the second quarter and profitably monetized CLO debt tranches. With CLO issuance gaining steam, we acquired newly issued investment-grade CLOs, and in June, Assured Management and Investment Management priced its first CLO issuance since the market dislocation. For the current market environment, this delay has impacted the realization of this business line's potential for the short-term, but we remain confident in its diversification strategy. Yesterday, we announced an important change within the leadership of our Asset Management business. Andrew Feldstein, Chief Investment Officer, and Head of Asset Management has decided to leave the company. David Buzen, BlueMountain's Deputy Chief Investment Officer, will assume Andrew's responsibility as CEO and CIO of BlueMountain and Head of Asset Management and CIO at Assured Guaranty. Andrew will continue to serve on the boards of BlueMountain funds and to support a smooth transition. He'll remain with the company as Senior Advisor to David through the end of October 2020. I want to thank Andrew for helping to establish and integrate our Assured Investment Management platform since we acquired BlueMountain last year. We are confident in the long-term prospects of our Asset Management business under the leadership of David Buzen and the talented senior management team. I want to emphasize that this leadership transition reflects no change in Assured Guaranty's strategy with respect to Assured Investment Management. We continue to support the growth of the business and have allocated $1 billion of our investment portfolio to investments it manages, with the goal of generating even greater value for our investors and policyholders. I look forward to seeing our Asset Management business making a significant contribution to the value of Assured Guaranty and I am certain Dave is the right person to lead this effort. He was the lead executive in our acquisition of BlueMountain and has been involved in every aspect of our Asset Management strategy and operations. He is a consummate financial professional who has served in top executive roles at a number of financial companies. As we work with David for a long time, he has over 30 years of experience including senior positions at ACE Financial Solutions, which required Capital Re when David was its CFO, and which is a company we now know as Assured Guaranty Corp. We are in the middle of a unique year, in which a previously unknown disease has affected millions of people, caused hundreds of thousands of deaths, and disrupted economies worldwide. Congress, the administration, and the Fed have taken action to provide money to people in need, inject monetary liquidity for businesses to survive, and support Capital markets. State and local governments are tackling the challenges of providing essential services, administering social programs, and meeting financial obligations, and have made sharp reductions in revenues. They deserve additional direct federal assistance to prevent large-scale layoffs of government employees and a potential cascade of economic hardships. We've been impressed by the determination of our insured issuers and public officials to maintain essential services while recognizing the imperative to meet debt obligations to preserve their access to the capital market. As a company, Assured Guaranty is better positioned than most to thrive in this environment. By definition, our main product is designed to give confidence to investors when the future is uncertain. Credit-conscious investors have driven increased demand for our guaranty, giving issuers a way to reduce the cost of financing when they most need to do so. We have abundant capital liquidity, supporting a 96% investment-grade insured portfolio consisting of transactions carefully selected to perform better under economic stress than others in their respective sectors. With our ability as a guarantor to work with issuers facing short-term liquidity problems or requesting reasonable amendments or waivers, we can help them in very serious financial trouble and we have now clearly demonstrated that we can be highly productive while prioritizing the safety of our employees and clients.
Rob Bailenson, CFO
Thank you, Dominic, and good morning to everyone on the call. I'm very pleased with our results and progress on our strategic initiatives this quarter. Despite the continued market turmoil, our business model proved resilient. We made significant progress in all three areas of our strategic focus. In our Insurance segment, we had strong new business development, which is replenishing our unearned premium reserve and offsetting the scheduled amortization of the existing book of business. In the Asset Management segment, we launched a new liquid asset strategy and restarted CLO issuance towards the end of the second quarter. In terms of capital management, we are ahead of our plan relative to the number of shares repurchased, which helped us propel our adjusted book value per share to over $100, a record high. Turning to second quarter 2020, adjusted operating income was strong coming in at $190 million or $1.36 per share. This consists of $154 million of income from our Insurance segment, a $9 million loss from our Asset Management segment, and a $26 million loss from our Corporate division, which is where we reflect our holding company interest and other corporate expenses. Starting with the Insurance segment, adjusted operating income was $154 million compared to $161 million in the second quarter of 2019. Net earned premiums and credit derivative revenues in the second quarter of 2020 were $125 million compared with $127 million in the second quarter of 2019. Structured finance net earned premiums and credit-driven revenues decreased to a total of $13 million due to the decline in this portfolio. On the other hand, public finance net earned premiums increased in the second quarter of 2020 compared to the second quarter of 2019 due to higher accelerations as well as a modest increase in scheduled net earned premiums, which is a result of increased premium writings in the last few quarters. In total, accelerations due to refundings and terminations were $32 million in the second quarter of 2020 compared with $29 million in the second quarter of 2019. Also contributing to our increasing unearned premiums reserve was the reassumption of a previously ceded book of business from our largest reinsurer. This reassumption resulted in a $38 million commutation gain. Net investment income for the Insurance segment was $82 million in the second quarter of 2020 compared with $110 million in the second quarter of 2019. The decrease was primarily due to a large non-recurring benefit in 2019 from the favorable settlement of a troubled insurance transaction, which decreased the size of the loss mitigation portfolio. Proceeds from the settlement were re-invested in lower-yielding assets. The average balance of the externally managed portfolio also declined, in part because of a shift into alternative investments, including Assured Investment Management funds, which are recorded at fair value in a separate line item, as opposed to net investment income. The second quarter 2020 Insurance segment adjusted operating income also includes a $21 million after-tax mark-to-market gain on our investments in Assured Investment Management funds. These investments are marked-to-market each reporting period with changes in the fair value recorded as a component of adjusted operating income in the line item equity and earnings of investees. The fair value gains on the investments in Assured Investment Management funds in the second quarter of 2020 were driven by the overall market rebound. As of June 30, 2020, the insurance companies had authorization to invest up to $500 million in funds managed by Assured Investment Management, of which $354 million has been invested as of June 30, 2020. Going forward, we expect adjusted operating income will be subject to more volatility than in the past, as we shift investments from fixed income securities. Our long-term view of the enhanced return from the Assured Investment Management funds remains positive. Loss expense in the Insurance segment was $39 million in the second quarter of 2020 and was primarily related to economic loss development on certain Puerto Rico exposures. In the second quarter of 2019, we recorded a benefit of $50 million primarily related to higher projected recoveries for previously charged up loans for second lien U.S. RMBS. An increase in excess spread, improved performance, and loss mitigation efforts offset, in part, by economic loss development on certain Puerto Rico exposures. The net economic development in the second quarter of 2020 was $34 million, which primarily consisted of loss development of $30 million in the U.S. public finance sector, primarily attributable to Puerto Rico exposures. Net economic loss development in U.S. RMBS of $1 million mainly consisted of increased delinquencies, offset by higher projected excess spread across both third and second lien transactions. In the Asset Management segment, adjusted operating income was a loss of $9 million. We had previously announced our strategy to transition the investment focus and business model of our Assured Investment Management platform core strategies, including the orderly wind down of certain hedge funds and legacy opportunity funds. Prior to the current market disruptions, we had made good progress on the winding down of legacy funds, with outflows of $541 million in the second quarter. We expect the restructuring to continue throughout 2020, but depending on the duration and market impact of the pandemic, the execution of our strategy may take longer than originally anticipated. Toward the end of the second quarter of 2020, we launched a new liquid asset strategy, with initial funds focused on investments in municipal securities. Additionally, in the second quarter of 2020, AGM, AGC, and MAC entered into investment management agreements with Assured Investment Management to manage a portfolio of their general account municipal obligations and CLOs. As of June 30, 2020, the insurance subsidiaries have together allocated $250 million to the municipal obligation strategies and $100 million to CLO strategies, with authorization to allocate an additional $200 million to CLO strategies. We believe the effect of the pandemic on market conditions and increased volatility may present attractive opportunities for the alternative asset management industry that Assured Investment Management may be able to capitalize on. Thus, our long-term outlook for the asset management platform remains positive. In our Corporate division, the holding companies currently have cash and investments available for liquidity needs and capital management activities of approximately $70 million, of which $80 million resides in AGL. Adjusted operating loss for the Corporate division was a loss of $26 million in both second quarter of 2020 and second quarter of 2019. This mainly consists of interest expense on the U.S. holding companies, public long-term debt, and intercompany to the insurance companies, which were primarily used to fund the BlueMountain acquisition. It also includes Board of Directors and other corporate expenses. On a consolidated basis, the effective tax rate may fluctuate from period to period based on the proportion of income in different tax jurisdictions. In second quarter 2020, the effective tax rate was 14.2%, compared with 21% in the second quarter of 2019. Turning to our capital management strategy, in the second quarter of 2020, we repurchased 6 million shares for $164 million, for an average price of $27.49 per share. Since the end of the quarter, we have purchased an additional 800,000 shares for $90 million, bringing our year-to-date repurchases as of today to over 10 million shares. Since January 2013, our successful capital management program has returned $3.5 billion to shareholders, resulting in a 60% reduction in total shares outstanding. As always, future share repurchases are contingent on available free cash, our capital position, and market conditions. The cumulative effect of these repurchases was a benefit of approximately $23.56 per share in adjusted operating shareholders' equity and approximately $42.76 in adjusted book value per share, which helped drive these important metrics to new record highs of $71.34 in adjusted operating shareholders' equity per share and $104.63 of adjusted book value per share, both of which represent record highs. I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.
Operator, Operator
The first question is from Andrew Harte with BTIG. Please go ahead.
Andrew Harte, Analyst
Hi, team. Thanks for the question. You mentioned in your prepared remarks that the company is taking some steps to proactively address the situation in which municipalities are under financial duress. Can you give us some color on some of the actions we've been taking there?
Dominic Frederico, President and CEO
Okay. Generally, it relates to us as we talked about, we went to our most vulnerable credits, reached out to the issuers, and talked to them about the financial plans for the remainder of the year to ensure that timely debt service payments were going to be made. If not, what was going to be the issue until we help. So typically the only real change that has been made to any deal is just a thought of a future debt service payment that might be restructured. So extending out the term, reducing the current payment, or back-ending some further payments, something of this nature is typical, but that's been very rare.
Andrew Harte, Analyst
Thanks.
Operator, Operator
Next question is from Tommy McJoynt with KBW. Please go ahead.
Tommy McJoynt, Analyst
Hey. Good morning, guys. Thanks for taking my question. I wanted to ask about Andrew leaving BlueMountain. Do you guys think that will have any impact on fundraising or flows or just a broader timeline of profitability in that segment?
Dominic Frederico, President and CEO
I think the market has the more significant impact on fundraising and other market timing. I think we actually are entering into a new phase in BlueMountain. So if you think about it, they have been winding down their legacy funds. There really hasn't been any fundraising other than the CLO issuance, which is a direct execution, some equity investing. So as we look to the company now, what do we are looking to do? We're looking to significantly increase our distribution capabilities, specifically in the fundraising area and to focus on the core competencies between the two organizations. We've got credit commonality as well as market commonality, and there is a real opportunity for us, and we still feel strongly about that as a real growth for the company. As I said, it kind of shifts the makeup of our P&L statement from less risk to some fee-bearing, and as the market opens up, we think we're in perfect position to capitalize on those opportunities.
Tommy McJoynt, Analyst
Got it. Thanks. And I want to switch gears; you've done about $300 million in buybacks year-to-date, obviously it's $500 kind of a target number on an annual basis. Can you get an update on whether or not you think you can go to the $500 this year? And just kind of the math for what you have available at the holding company in the remaining operating dividend capacity from the subsidiaries?
Dominic Frederico, President and CEO
Rob, you want to take that?
Rob Bailenson, CFO
As we’ve mentioned before, we can realistically reach about $250 million to $300 million without special dividends or additional financing. Given the activities we've seen so far, we've already repurchased more shares than initially planned for this year, exceeding 10 million shares. It's important to focus on the percentage of shares we've repurchased. However, without special dividends or other financing options, we can only buy back a limited number of additional shares in the upcoming quarter. Would you like to add anything?
Tommy McJoynt, Analyst
And any sense of why you didn't want to look into sources of special financing? Or not going to comment on that right now?
Rob Bailenson, CFO
We're always evaluating our financing options. So, yes, we will consider it and we will evaluate our current plan.
Tommy McJoynt, Analyst
Okay, thanks. And then just last one, there was a recent court victory that allowed the guarantors to proceed with claims against some of the banks for underwriting in Puerto Rico. Was there any impact on that in your report this quarter? And just how should we think about potential recoveries from that?
Dominic Frederico, President and CEO
We're not a part of that litigation. Obviously, we didn't have any impact on our financial statements from that judgment. We would expect this thing to go through an appeal process, and we'll continue to evaluate it as it moves along the course.
Tommy McJoynt, Analyst
Okay, thank you.
Operator, Operator
The next question is from Geoffrey Dunn with Dowling. Please go ahead.
Geoffrey Dunn, Analyst
Thanks. Good morning.
Dominic Frederico, President and CEO
Hey, Geoff.
Geoffrey Dunn, Analyst
I'm not sure I'm completely following the commitment to the asset management business in terms of funds from the insurance. Can you review that again? You mentioned the $354 million out of $500 million and then the $250 million to $100 million and additional $200 million authorization. Can you split out a little bit more so I understand what you're doing?
Dominic Frederico, President and CEO
Yeah, I'll let Rob go over the numbers. But the big takeaway, you got to think about, Geoff, is as we look at our portfolio, we look at the changing capital charges to the portfolio from the S&P revisions last year. Obviously, we wanted to start investing more up and down the spectrum of credit and probably wider in terms of asset class. At the same time, we said, if we're going to do that, we can obviously pay a third party or we can do it internally. If we do it internally, that would be great. That would also lead to us driving the opportunity to develop a new business, a new revenue stream and lower the beta, the risk in the overall organization by looking at fee income. So the two are married together as kind of a cohesive look at the opportunity we see to increase yield across our investment portfolio, principally based on the S&P kept our changes and at the same time driving new business opportunity a new enterprise within the organization. Rob can give you the numbers as to how many billion-dollar commitment breaks down.
Rob Bailenson, CFO
Hold one second. As you can imagine, there have been power outages in New York and Connecticut, kind of made it piecemeal. Some of the stuff together we've got people in different people's houses, et cetera, people on the phones as opposed to Zoom. So it's been a little difficult putting stuff together and making sure we can present this earnings call kind of cohesively, and I think we're doing as good a job as we can. So, Mr. Bailenson, have you found your information? We have. So I said we funded $354 million from AGAS. We have $250 million funded in the muni fund. We have CLO, funded about $100 million to get to about $704 million. We've got authorization for $500 million at AGAS, which is the investment subsidiaries and we've been authorized for $250 million for the muni fund as well as $300 million for additional CLO activity in IMA. It's coming to $1 million, over $1.50 billion.
Dominic Frederico, President and CEO
So remember, Geoff, we're going to jump in two components. One is a $500 million commitment to AGAS, it's your dedicated subsidiary owned by AGM and AGC that then gets invested in various funds and new funds that are being developed and authorized to BlueMountain. $365 million of that is committed already, so there is still some dry powder there. The rest we're doing is on the balance sheets of AGC and AGM in terms of the IMA Investment Management Agreement, where they're going to have a municipal portfolio, a CLO equity portfolio, and opportunities in the municipal portfolio. So that's kind of how it breaks down.
Rob Bailenson, CFO
And then the CLO.
Dominic Frederico, President and CEO
Okay.
Rob Bailenson, CFO
So it's in the CLO debt that I referenced in the IMA is investment grade debt.
Geoffrey Dunn, Analyst
Okay. So $354 million funded of really what was the original $500 million commitment that I think you shared with us.
Rob Bailenson, CFO
Yes.
Geoffrey Dunn, Analyst
And $250 million out of another $500 million authorized is funded into muni funds and $100 million funded into CLOs out of a $300 million authorization...
Rob Bailenson, CFO
Yeah, you missed them.
Geoffrey Dunn, Analyst
The latter two are out of the directly out of...
Rob Bailenson, CFO
With $550 million authorized, there is $250 million for municipal funds and $300 million for CLO debt that was authorized. We have funded $250 million for municipal funds and $100 million for investment-grade CLOs.
Geoffrey Dunn, Analyst
Okay. And the difference is the 354 is coming out of AGAS and the 250 - or the $250 million authorized and $300 million authorized is coming directly from the subsidiary balance sheets.
Rob Bailenson, CFO
For the separate IMA.
Geoffrey Dunn, Analyst
Got you. Okay. Thank you.
Operator, Operator
The next question is from John Helmers with Long Focus. Please go ahead.
John Helmers, Analyst
Hey, everyone. I appreciate you taking my question. Dominic, I've been an investor in Assured since the financial crisis, and it seems like you keep facing one challenge after another. I would appreciate it if you could explain why the market believes that the imminent threat of state bankruptcies will eliminate the value that is clearly present. Otherwise, the disconnect between equity and adjusted book value doesn’t make sense. Can you help clarify why you are confident that the stress on states won’t lead to that outcome?
Dominic Frederico, President and CEO
I understand your concerns, and as a large individual shareholder myself, I share your frustration with the current stock valuation, which I believe is illogical. As our portfolio decreases, our exposure to larger states diminishes as well. In New Jersey, for instance, there will be significant amortization in the next five years that will reduce our financial involvement in various facilities. Currently, there is no provision for state bankruptcy without violating the U.S. Constitution, which would require a constitutional amendment. While we can discuss potential political turmoil, what’s critical is the credibility and efficiency of U.S. capital markets, as states need to borrow money regularly. Their budgeting relies on projecting future revenues against current fiscal needs, highlighting the importance of municipal borrowing and its tax-exempt status. Therefore, we believe state bankruptcies will never be permitted. Additionally, while Puerto Rico is in the process of restructuring, it still faces numerous constitutional challenges. The U.S. Constitution's takings clause prevents the removal of legally granted rights, and retroactive state bankruptcy would violate that principle. We are convinced that allowing such bankruptcies would disrupt financial markets and negatively impact municipal bond pricing. Despite reducing our exposure to various states, this remains less of a concern as we adjust our credit limits. Under the leadership of Steve Donnarumma, our credit team reviews limits every two years and continues to lower them, effectively managing risk. While we recognize various opportunities in the market for business growth, we remain vigilant in our risk management without envisioning catastrophic scenarios. Though challenges exist, the U.S. Constitution provides us with a form of protection.
Rob Bailenson, CFO
Let me also add, muni credit spreads are very, very tight. So the market is perceiving much less risk, which would mean that AGO is completely undervalued. People are buying muni bonds at historically tight credit spreads.
John Helmers, Analyst
No, listen, I see the disconnect and the inconsistency in the markets, and obviously, and that's very helpful. I appreciate you addressing that, both of you. But because it makes no sense, and obviously, it goes back to the comment around the ability to repurchase shares because assuming the Armageddon scenario doesn't play out, which obviously is a very good bet, then the accretion is, at least, in the 10 years that I've been invested has never been more compelling than it is today. And so...
Dominic Frederico, President and CEO
We acknowledge and understand your point. It's important to recognize that states depend on the market to finance capital improvements and fulfill short-term obligations. Our revenue claim on them is primarily perpetual, meaning we have a permanent lien concerning our recovery. Without a constitutional amendment, which would likely face legal challenges due to constitutional clauses, achieving that is tough. The potential collapse of financial markets would have severe consequences in the United States, similar to suggesting that the U.S. should default on treasury notes to see its borrowing capacity decrease: it's simply not feasible. Additionally, as Rob highlighted, the current yields in the municipal market and the spreads indicate that concerns about credit quality may be overstated. For instance, Illinois was able to issue more debt at reasonable prices. Ultimately, whatever issues are being directed at Assured Guaranty are clearly not representative of the wider market, and with the difference between value and price, a loss of that magnitude is not realistically sustainable enough to significantly alter that relationship.
John Helmers, Analyst
Thanks. I appreciate you addressing.
Operator, Operator
This concludes our question-and-answer session. I would like to the conference back over to Robert Tucker for any closing remarks.
Robert Tucker, Senior Managing Director, Investor Relations
Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.
Operator, Operator
The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.