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Bond Insurer Ambac Looking At Possible Bankruptcy by Year-End

Source: WSJ

Posted on 01 Nov 2010

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On Monday Ambac Financial Group warned that it may have to file for bankruptcy by year-end if it is unable to reach an accord on a pre-packaged bankruptcy agreement with its debtholders.

The announcement came as Ambac, a bond insurer that sold protection on mortgage securities, said its board had voted to skip an interest payment on senior notes due in 2023. The payment was due to be made Monday; if the insurer hasn't paid in 30 days, it would be in default and its debtors could accelerate the maturity of the notes.

The decision to skip the interest payment is an attempt to force the hand of Ambac's debtholders. The company, whose guarantees on mortgage securities have soured as homeowners have fallen behind on their loans, had said it was attempting to negotiate a pre-packaged bankruptcy with a group of its senior debtholders. But the default places additional pressure on creditors, who could face a lengthy, costly fight in court if they don't agree to such a pre-packaged arrangement.

Within 30 days, Ambac said, it will pay the skipped interest payment, file for bankruptcy without a prior agreement with its creditors, or reach an agreement and file a pre-packaged bankruptcy.

If Ambac debtholders don't reach an agreement, a potential bankruptcy-court fight with the Ambac holding company would be complicated by the obligations its operating subsidiary has to its policyholders.

As capital at Ambac ran short, the subsidiary was seized by its regulator in Wisconsin and placed into "rehabilitation." That process is overseen by a Wisconsin court and the Wisconsin insurance regulator; the regulator would likely argue that the funds held by the operating company are due to policyholders ahead of debtholders.

The Wisconsin insurance commissioner, Sean Dilweg, had no comment on Monday.

Further complicating the decision for debtholders are $7 billion of earlier net operating losses. The losses, perversely, are now an asset: They can be used to reduce taxes the company might pay if it were to return to a profit. The Internal Revenue Service, however, places restrictions on how they can be used. One trigger that would limit their use would be a bankruptcy that replaces debt with equity and hands a substantial amount of new shares to any investors that already owned 5% of the stock.

Ambac shares were down 39% to 51 cents in late-morning trading.

Ambac said in a securities filing that "several factors" will influence which path it takes, including "the status of negotiations with the ad hoc committee of senior debt holders and actions required to preserve" net operating losses.

Ambac had total indebtedness of $1.62 billion as of June 30.

Ambac and its regulator are also fighting in the Wisconsin court with some of Ambac's policyholders over a plan to segregate $50 billion of its policies backing structured securities.

The commissioner's plan, announced in October, would allow claimholders of those segregated policies to receive 25% of their claims in cash and 75% in the form of 10-year notes with a 5.1% coupon. The idea is to preserve enough cash so the bond-insurance unit can continue to pay claims on the rest of its policies.Ambac's bond-insurance unit hasn't underwritten new business since mid-2008.