It’s official: Ambac’s CDS triggered | FT Alphaville

It’s official: Ambac’s CDS triggered

It’s the event Ambac thought would never, ever come:

The International Swaps and Derivatives Association, Inc. (ISDA) announced that its Americas Credit Derivatives Determinations Committee resolved that a bankruptcy credit event has occurred in respect of Ambac Assurance Corporation, which provides financial guarantee insurance for public and structured finance obligations. The Committee also voted to hold an auction for Ambac.

Three things are worth pointing out here. First, Ambac assurance hasn’t actually filed for bankruptcy protection, but it is involved in a complicated restructuring/partial takeover by its regulator/failure to pay-type situation.

(As for why this was classed as a bankruptcy event rather than a restructuring or failure to pay, we think it may have to do with subsection (f) of section 4.2. of the 2003 ISDA Credit Event Definitions)

Second, the credit default swaps that have been triggered are only those that have been written as protection on Ambac, not those the bond insurer itself sold against CDOs and other structured products. According to DTCC data as at March 19 2010, the credit event will affect some $3bn of CDS.

Third, a CDS auction on a bond insurer is not unprecedented: Ambac will be following in the footsteps of Syncora (formerly known as SCA) and FGIC.

In the former case, the auction ended with a final price of 15 cents on the dollar, meaning sellers of protection were on the hook for the other 85. FGIC’s auction ended with a final price of 26 cents, so protection sellers would have had to pay out $7.4m for every $10m contract.

In both cases, however, the actual sums that changed hands would have been smaller, since some collateral would have been posted against the positions – especially given the multi-notch downgrades experienced by both FGIC and Syncora over time.

Related links:
Ambac policyholders information centre – Wisconsin Office of the Commissioner of Insurance
Ambac attack! – FT Alphaville
Ambac inches closer to the inevitable – FT Alphaville
Ambac clings to life (updated) – FT Alphaville