Discussion in 'Stocks' started by zdreg, Apr 9, 2010.
nice short squeeze
Last month, state insurance regulators unveiled a plan to seize part of Ambac's main insurance business, Ambac Assurance, to protect hundreds of billions of dollars in guarantees on municipal bonds. Read about Ambac's 'amputation.'
Wisconsin's Office of the Commissioner of Insurance, or OCI, seized the part of Ambac Assurance that guarantees residential mortgage-backed securities and other securities that have been hit hard by the real-estate meltdown and financial crisis.
The plan aims to slice off Ambac's toxic exposures, leaving it strong enough to stand behind more than $300 billion worth of other guarantees -- mainly in the municipal-bond market.
The Wisconsin regulator will likely settle the guarantees on toxic assets at large discounts, partly because counterparties have already written down the value of these exposures, Sean Egan, president of rating agency Egan-Jones Ratings, said in an interview Tuesday.
Counterparties will likely try to challenge the reorganization, but will probably struggle because they will be battling against the decision of a state insurance regulator, which carries more legal weight, he added.
The remaining Ambac business will be left guaranteeing less-risky muni bonds and won't be exposed to huge losses from the housing market meltdown, Egan explained.
"It's a huge, huge positive," he said. "There'll be something for equity holders. Whether or not this will turn into a viable future business is another matter."
Egan compared Ambac's situation to a homeowner with two houses. One is worth $100,000 but has a $150,000 mortgage on it. The other is worth $100,000 with a $70,000 home loan. Together, the houses are worth $200,000 and the debt is $220,000, leaving $20,000 of negative equity.
"What if someone came along and said we'll take the underwater asset off your hands and leave you with the other one where you only owe $70,000?" Egan said. "Your net worth would suddenly go to a positive $30,000 from a negative $20,000."
That's essentially what the Wisconsin insurance regulator has done for Ambac, Egan said.
10Q filed yesterday (Mon 17 May) evening:
There's a lot in there, including:
* a going concern warning from management
"management has concluded that there is substantial doubt about the ability of the Company to continue as a going concern."
* possibility of prepackaged bankruptcy
* no guarantee of paying operating expenses and debt service obligations after Q2 of 2011
* may decide prior to Q3 to stop paying interest on debt
"In addition, Ambac may consider, among other things, a negotiated restructuring of its outstanding debt through a prepackaged bankruptcy proceeding or may seek bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups. No assurance can be given that Ambac will be successful in executing any or all of these strategies.
"While management believes that Ambac will have sufficient liquidity to satisfy its needs through the second quarter of 2011, no guarantee can be given that it will be able to pay all of its operating expenses and debt service obligations thereafter, and its liquidity may run out prior to the second quarter of 2011. Further, Ambac may decide prior to the third quarter of 2010 not to pay interest on its debt. "
Related information from page 7 of 10Q:
"On March 24, 2010, Ambac Assurance acquiesced to the request of the Office of the Commissioner of Insurance of the State of Wisconsin (âOCIâ) to establish a segregated account pursuant to Wisc. Stat. Â§611.24(2) (the âSegregated Accountâ). Under Wisconsin insurance law, the Segregated Account is a separate insurer from Ambac Assurance for purposes of the Segregated Account Rehabilitation Proceedings (as defined and described below)."
Specific timing relating to liquidity difficulties:
As a result of the events described in Note 1 of the Notes to Consolidated Unaudited Financial Statements of this Form 10-Q, it is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac for the foreseeable future.
Based on the holdings of cash and short term investments of $107.3 million as of March 31, 2010, management believes that Ambac will have sufficient liquidity to satisfy its needs through the second quarter of 2011, but no guarantee can be given that Ambac will be able to pay all of its operating expenses and debt service obligations including maturing debt obligations in the amount of $142.5 million in August 2011.
The 1 August 2011 (9.375% coupon) bond is offered below 65.
This suggests that shareholders (yesterday close = $1.46) are quite optimistic about the company's future.
In recent days I've seen the August 2011 bond trading below 50.
ABK shares closed @ 92 cents, much lower than the $1.46 level from my last post of 9 days ago.
Bloomberg article here:
about settlement for those who bought bond insurance from ABK.
From my initial read it looks like a $2.6 billion cash payment plus an empty promise from ABK to pay the rest at a future date.
I have no idea where ABK will be able to find $2.6 billion.
I might be missing something here. On the other hand if the $2.6 billion payment is due in a matter of days / weeks, then it could possibly be days / weeks until ABK starts the Chapter 11 process.
Useful web site here for Ambac policyholders:
Are you still "active" in the stock ?
yes, I still think the stock is overvalued @ 92 cents.
According to this article, it looks like claims will be paid by September at the latest.
In any case, ABK has previously disclosed in its 10Q that
(1) it probably won't be able to repay its August 2011 bonds
(2) it may not pay interest from Q3 onwards
(3) prepackaged bankruptcy may be required
By Romy Varghese Of DOW JONES NEWSWIRES
A state regulator's proposal to staunch the bleeding of troubled bond insurer Ambac Assurance Corp. is moving forward after a Wisconsin circuit judge Tuesday denied motions seeking to prevent a deal with banks holding Ambac-insured securities.
Ambac Assurance is a unit of Ambac Financial Group Inc. (ABK).
The Wisconsin Office of the Insurance Commissioner had in March unveiled a plan that would give a group of up to 17 banks $2.6 billion in cash and $2 billion in securities called surplus notes. In exchange, the banks would tear up $17 billion worth of Ambac-insured collateralized debt obligations.
These banks, identified in court filings, include Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC), Banco Santander (STD, SAN.MC), Barclays Bank PLC, BNP Paribas SA (BNPQY, BNP.FR), Canadian Imperial Bank of Commerce (CM, CM.T), Citibank N.A., Citigroup Global Markets Limited, Commerzbank AG London Branch, Credit Agricole Corporate and Investment Bank, Natixis (NTXFY, KN.FR), Natixis Financial Products Inc., Royal Bank of Scotland PLC (RBS, RBS.LN), Societe Generale SA (SCGLY, GLE.FR) and UBS AG London branch.
But two groups of investors who owned Ambac-insured bonds filed motions seeking to block any settlement, arguing it was unfair and could hurt their claims.
One group of investors includes hedge funds Aurelius Capital Management, Fir Tree Inc., King Street Capital LP, King Street Capital Master Fund, and Monarch Alternative Capital LP and money manager Stonehill Capital Management, who say they own or manage $1 billion of residential mortgage-backed securities backed by Ambac insurance contracts. The other group includes Eaton Vance, Nuveen Asset Management, Restoration Capital and Stone Lion Capital, who say they own a majority of Las Vegas Monorail Project Revenue bonds guaranteed by Ambac insurance. Freddie Mac, which holds $2 billion of residential mortgage-backed securities backed by Ambac insurance contracts, later joined in the motions.
These investors' policies have been placed in a segregated account by the insurance commissioner that hold $68 billion worth of contracts on residential mortgage-backed bonds and other kinds of structured securities. Claims made by owners of assets in the segregated account won't be paid until the court approves a rehabilitation plan, which the regulator expects by September.
The segregated account is capitalized by a $2 billion secured note due 2050, and remaining claims would largely be satisfied by surplus notes from the general account.
In an oral ruling in Darlington, Wis., on Tuesday, however, Judge William D. Johnston denied the motions to stop the settlement with the banks, according to the regulator's office.
Failure to settle with the banks would have increased the amount of claims by more than $8 billion, the regulator said.
"The steps we're taking are aimed at avoiding billions of dollars of losses, and will provide the best way toward a durable solution for all policyholders," said the commissioner, Sean Dilweg, in a statement. "There are very real and dramatic risks, if the orderly process we are pursuing is not preserved."
Lawyers for the investors didn't return requests for comment.
Ambac had been losing millions of dollars a month from the toxic structured securities it guaranteed. In the fourth quarter of 2009, it saw a total net loss and loss expenses of $385.4 million.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; email@example.com
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