3rd UPDATE:Ambac Mulls Bankruptcy As It Skips Interest Payment
November 01 2010 - 3:21PM
Dow Jones News
Ambac Financial Group Inc. (ABK) warned Monday it may file for
Chapter 11 by the end of the year if it is 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
a $2.8 million 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 appears to be 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 threat of a 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.
"Certainly to an extent there's some posturing, but it's a
coherent argument that either [debtholders] agree to some sort of
pre-packaged arrangement or else head into Chapter 11," said Rob
Haines, an insurance analyst at CreditSights. In Chapter 11, he
said, "any kind of reorganization becomes that much more
difficult."
Ambac said in a securities filing Monday that it intends before
the 30-day window closes to either 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 pre-packaged bankruptcy is negotiated with creditors
before the filing and therefore has their substantial approval,
eliminating the need for a lengthy court fight.
Elsewhere in the filing, the company said it "intends to file
for bankruptcy under Chapter 11 of the United States Bankruptcy
Code prior to the end of the year" whether or not it reaches a
pre-packaged deal.
If Ambac doesn't reach an agreement with holders of its debt, a
bankruptcy-court fight between the creditors and the Ambac holding
company would be complicated by the obligations Ambac's operating
subsidiary has to 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.
Debtholders may feel the Wisconsin regulator's desire to avoid a
legal fight may give the regulator incentive to release some
portion of those funds to the holding company as the 30-day
deadline approaches.
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 39% to 51 cents in afternoon trading.
Ambac said "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" tax
benefit of 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
(Michael Aneiro and Matt Jarzemsky contributed to this
article.)
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