2nd UPDATE: Ambac Mulls Bankruptcy As It Skips Interest Payment
November 01 2010 - 11:37AM
Dow Jones News
Ambac Financial Group Inc. (ABK) warned Monday it may file for
Chapter 11 by the end of the year if it's unable to reach an accord
on a faster 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 still 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 represents 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 already said it had been
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 Chapter 11 bankruptcy without a prior agreement
with its creditors, or reach an agreement and file a pre-packaged
bankruptcy. A prepackaged bankruptcy is negotiated with creditors
before the filing and therefore has their substantial approval,
eliminating the need for a lengthy court fight.
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 Monday morning.
Further complicating the decision for Ambac's 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 fell by 52% to 40 cents in morning trading.
Ambac said in a securities filing Monday 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 the" 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 announced a plan in October that 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.
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
(Matt Jarzemsky contributed to this article.)
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