In looking to determine if they should take a position in a stock, investors look for inflection points in the share price, valuation and fundamentals. That’s especially true with event driven investors, and based on what’s going on in Puerto Rico it stands to reason that more than a few even driven investors are sizing up potential opportunities in monoline insurance companies like Ambac Financial Group (AMBC), Assured Guaranty (AGO), MBIA Inc. (MBI), FGIC and Syncora Holdings (SYCRF).

Why would event driven investors be eyeing these companies?

Pretty much, Puerto Rico is a mess. It has more than $72 billion of debt, an estimated $30 billion shortfall in its state pension fund, two government agencies have already defaulted on debts, and it faces a $2 billion payment on July 1st.

How did the situation get this?

Like most governments that spend more than they collect, Puerto Rico issued bonds to cover budgetary shortfalls, and due to the favorable tax status that exempted these bonds from federal, state, and local taxes in all 50 states there was a hefty demand from the investment community. That started to change in 1996 when Congress brought and end to favorable tax breaks for U.S. manufacturers operating in Puerto Rico. With a key inducement for those companies no longer in place, they closed down their operations and as any junior economist can tell you the resulting economic slump was written on the walls.

Change is difficult and in this situation, Puerto Rico doubled down on the same strategy it had been following. That doubling down led to a doubling of its debt over the ensuing years and the wind up  is the island is now in the throes of what is shaping up to be bankruptcy.

Why monoline insurance companies?

Monoline insurance companies provide guarantees to issuers, often in the form of credit wraps, that enhance the credit of the issuer, in this case Puerto Rico. For decades monoline insurance companies like Ambac Financial Group (AMBC) have been critical to Puerto Rico’s ability to access the capital markets and obtain low cost financing to fund its government and build its critical infrastructure.  Approximately 20% of Puerto Rico’s municipal bonds are guaranteed by monoline insurance companies, including Assured Guaranty (AGO), MBIA Inc. (MBI), FGIC and Syncora Holdings (SYCRF).

On its own, Ambac insures $2.2 billion of municipal bonds issued by the government of Puerto Rico. The company’s biggest exposure is to COFINA sales tax bonds, which don’t pay principal or interest until 2047-2054. By the time these bonds mature, Ambac will likely become the government’s largest creditor. With Puerto Rico barreling toward bankruptcy, shares of these monoline insurance companies have been hit, which makes them of potential interest for event driven investors.

Despite the claims of the Governor of Puerto Rico and his bankruptcy advisors, to say that Puerto Rico is over levered implies the US is as well.  Including federal, state and local debt and unfunded pension and OPEB liabilities, Puerto Rico’s total debt to GDP is 98% compared to 118% for the U.S.  As the only tax haven within the US, Puerto Rico’s total tax collections to GDP is 11%, roughly half that of the US.  Unfortunately, it appears the government of Puerto Rico has failed to reduce its expenditures and do everything it can in order to honor its financial obligations.

If not bankruptcy, then what should be done?

For the benefit of creditors and residents, Puerto Rico needs a responsible solution that is comprehensive and puts it on the path to sustainability.  A responsible solution is one in which the government honors its financial obligations and implements meaningful fiscal reforms in order to strengthen its fiscal position and restore access to the capital markets.

In addition, the government must implement meaningful structural reforms in order to encourage private investment, create jobs and grow the economy.   As part of these structural reforms, the government should implement a meaningful privatization program in order to reduce the size of the government and shrink the government’s debt load.  Such a privatization program would increase private investment, create jobs and grow the economy.  Should signs emerge that Puerto Rico is on the path to such reforms, event driven investors that can stand the risk and more than eye monoline insurance companies could reap big benefits.

Christopher (Chris) Versace is the editor of the newsletter The Growth & Dividend Report and is a featured columnist to The Street.com as well as a contributor to FoxBusiness.com and Forbes.com. To read more of his blogs, CLICK HERE NOW.