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Ambac Financial Commutes $16.4 Billion in CDOs

Source Dow Jones

Posted on 08 Jun 2010

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Ambac Financial Group Inc. said it commuted all of its remaining $16.4 billion of exposure to collateralized debt obligations of asset-backed securities.

The commutation agreement, worked out with the help of Ambac's regulator, the Wisconsin Office of the Insurance Commissioner, calls for its bond-insurance unit, Ambac Assurance Corp., to pay $2.6 billion in cash and to issue $2 billion in new surplus notes to banks holding its CDOs of asset-backed securities. The 10-year surplus notes will pay annual interest of 5.1%.

Other asset-backed securities transactions worth $1.4 billion were commuted for cash payments of $96.5 million and another $1.5 billion of asset-backed securities likely will be commuted in the next 12 months for about $115 million in cash plus $60 million of surplus notes.

Last week, Ambac settled with investors who bought insurance against guarantees sold by Ambac Assurance, agreeing to pay 80 cents on each dollar they're owed based on the results of an auction Friday to settle the protection contracts.

Ambac was a leader in the bond-insurance industry before its guarantees tied to risky subprime bonds and other complex securities roiled the firm. It hasn't been writing new insurance contracts and, in its latest 10-K filing, warned that its liquidity may run out before the second quarter of 2011.