On Wednesday bond insurer Ambac stunned investors with what looked like good news.
Ambac Assurance Corp., the main operating branch of the Ambac Financial Group, had been expected by many to reveal a breach of its minimum capital requirement when the company published its third-quarter 8-K this week. But lo and behold, the division managed to record statutory capital of $856m – well above the $2m requirement set by regulators. Had it fallen below that minimum it might have been taken over by regulators, thereby triggering termination payouts of $23.1bn on Ambac-insured CDS contracts.
So problem averted? And it would have been some problem, as BNP Paribas analyst Rafael Villarreal reminded us in a Thursday note:
The text that follows details the sequence of events that could follow the initiation by the OCI [the Office of the Commissioner of Insurance of the State of Wisconsin]of “delinquency proceedings” in order to protect policyholders, which would include the occurrence of an event of default with respect to Ambac’s debt and potential acceleration of principal for $1.6bn; termination of CDS contracts insured by Ambac Assurance [AAC], “which could liquidate mark-tomarket claims in respect of underlying exposures in the amount of $23.1bn”, and the “loss of control rights by Ambac Assurance in respect of insured transactions, compromising [its] ability to mitigate loss in its insured portfolio and to fully realize the credit for remediation inherent in its loss reserves.”
What does this mean in the context of the group’s and the company’s financials? . . . The first means an immediate cash call of $1.6bn which it does not seem to have; the second is hard to fathom (as the net payment on the $23bn could be any negotiated amount but starting with negative net worth of $2.17bn and a negative operating cash flow does not help); and the third represents an indefinite rise in liabilities as loss mitigation actions are prevented. That was the market’s expectation as it awaited the publication of the Statutory filing. Because of the importance of AAC to ABK [Ambac Financial Group], ‘delinquency proceedings’ on AAC would pretty much mean the end of the group. Anything other than its demise would be well received and as the AAC filing . . .
And well-received it was. Ambac shares rose some 44 per cent on Wednesday, to $1.01, while its CDS narrowed.
But, importantly, there remain many in the analyst community who are decidedly bearish on the insurer’s prospects, and Villarreal is among them:
The main operating company has a business that is shrinking and barely breaking even before investment losses are taken into account. The exposures on contracts are substantial and a significant proportion in US property RMBS, MBS and home equity securities from which substantial losses could emerge. The market will continue to expect that an Ambac CDS event will come within the next 6 months.
Ambac Group shares were down 5 per cent at $0.96 in pre-market trading in New York on Thursday.
Did we just witness the limit of good news for Ambac?
Related links:
Ambac warns of bankruptcy risk – FT Alphaville
Ambac clings to life – FT Alphaville
The travails of the financial guarantors – FT Alphaville
Moody’s and the monolines – FT Alphaville