Ambac’s shares tumbled more than 20 per cent in mid-morning trade in New York on Thursday, after its regulator moved to take over some of the bond insurer’s more troubled assets – some $35bn worth.
Regulators in Wisconsin, where Ambac Assurance is domiciled, ordered the bond insurer to ‘segregate’ those assets that have already generated significant losses, or are likely to.
In a statement, Ambac said it did not think the hiving off of those assets constituted an event of default, and that it had “reached a non-binding agreement on the terms of a proposed settlement agreement with several counterparties to commute substantially all of its remaining collateralized debt obligations of asset-backed securities”.
(What this means is that Ambac has agreed to pay policyholders a fee upfront in exchange for the counterparty agreeing to tear up the contract)
The regulator also received court approval to “impose a temporary moratorium on further claim payments to Segregated Account policyholders pending approval of a plan of rehabilitation”, according to a statement. The regulator has so far skipped payments worth about $120m.
That action is likely to trigger payouts on credit default swaps written against Ambac, as happened with both Syncora and FGIC.
The bond insurer also managed to persuade “counterparties to credit default swaps insured by [Ambac Assuarance] representing a significant portion of the net notional amount outstanding as of December 31, 2009…to temporarily forebear from accelerating the obligations of [Ambac Assurance] under such credit default swaps or asserting any claims against [Ambac Assurance] or any affiliate of [Ambac Assurance]based upon the segregated account rehabilitation proceedings.”
In effect, they’ve bought themselves some time to work something out.
But there’s another, scarier scenario. One described by CreditSights back in December as a “nuclear event” (emphasis ours):
a failure of this restructuring process and a continued violation of the OCI’s minimum capital requirement could result in a regulatory seizure of Ambac. This would set off the so-called “nuclear event”; which entails a number of adverse consequences including an event of default for $1.6 billion of Ambac’s holding company debt and the termination of CDS insured by Ambac Assurance which could liquidate mark-to-market claims in respect of underlying exposures in the amount of $23.1 billion.
Based on our conversations with the [New York Insurance Department], it is possible that the regulators could close the books for a number of years to see how claims shake out before making partial prorata payments and then closing the books again and letting all the policies run out before a final payment is made. Additionally, certain components of claims paying resources, such as installment premiums, would essentially be worthless under receivership. In all, this would equate to a recovery of pennies on the dollar
Even things don’t quite come to that, buried at the bottom of Ambac’s statement on the move by the Wisconsin regulator was the following paragraph:
Ambac may consider, among other things, a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding or may seek bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups
Ambac had first warned of bankruptcy risk back in November.
Somewhere, Bill Ackman is laughing.
Related links:
Ambac attack! – FT Alphaville
Ambac inches closer to the inevitable – FT Alphaville
Ambac clings to life (updated) – FT Alphaville
A successful restructuring would recapitalize the company and give a significant chunk of Ambac’s relatively healthy books of business to the CDO holders and would end with either the company going into run-off or obtaining high ratings and writing new business again. </P> <P style="MARGIN: 0in 0in 0pt"> </P> <P style="MARGIN: 0in 0in 0pt">We believe that a large scale commutation of CDOs of ABS would be contingent on a successful tender of troubled RMBS. The Syncora restructuring lays the groundwork for this type of thinking and, from its filings with the SEC (8-K dated March 6, 2009), the company intimated that the large scale commutation of CDOs of ABS was not possible without the tender of certain RMBS securities. </P>
<P style="MARGIN: 0in 0in 0pt"> </P> <P style="MARGIN: 0in 0in 0pt">However, a failure of this restructuring process and a continued violation of the OCI’s minimum capital requirement could result in a regulatory seizure of Ambac. This would set off the so-called “nuclear event” which entails a number of adverse consequences including an event of default for $1.6 billion of Ambac’s holding company debt and the termination of CDS insured by Ambac Assurance which could liquidate mark-to-market claims in respect of underlying exposures in the amount of $23.1 billion. Based on our conversations with the NYID, it is possible that the regulators could close the books for a number of years to see how claims shake out before making partial prorata payments and then closing the books again and letting all the policies run out before a final payment is made. Additionally, certain components of claims paying resources, such as installment premiums, would essentially be worthless under receivership. In all, this would equate to a recovery of pennies on the dollar