You won’t find Ambac mentioned in Punch Tavern’s most recent annual report.
But it’s there. Hovering — waiting — in the background.
The zombie US bond insurer began guaranteeing some of the British (toxic) pub co.’s formidable securitisation programmes back in 2003. In fact, some of the press releases for the deal make for ironic post-mortem structured finance reading.
From Ambac – Financial peace of mind.®
The Ambac Assurance guarantee, a critical component for investors, backs £300 million in class A2 notes and £150 million in additional notes sold in the public markets. Ambac also guaranteed an additional portion of debt placed privately with investors. The complexity of the transaction garnered the market’s attention: the Punch transaction was named “European Asset-Backed Securities Deal of the Year” by International Securitisation Report magazine.
(Some other awards won by Ambac — 2007 Monoline Insurer of the Year, Corporate Corporate Deal of the Year, Europe — also for Punch Taverns)
We bring it up because Ambac looks all but set to limp into bankruptcy after its Monday announcement that it would not make a scheduled interest rate payment on one of its bonds. According to the analysts at Seymore Pierce, Ambac still guarantees some of Punch’s securitisations. So the insurer’s troubles could provide an interesting case study of how the death of a US monoline will affect a very British business.
Here’s what they say:
Ambac insured a substantial proportion of the higher rated debt within Punch Taverns’ securitizations, making it a form of ‘trustee’ over the top of the bond structures. The [Tuesday] article in the FT … said that Ambac “…had branched out into structured finance in search of higher profits than were available in their traditional business of insuring municipal debts”. In the case of Punch Taverns, as one of the structured finance vehicles insured by Ambac, it is a rare instance of the ‘sub-prime’ disease spreading from this side of the Atlantic to the other.
The implication of the (potential) bankruptcy of Ambac is unclear but could be material for stakeholders in Punch Taverns. It may be that the responsibility of Ambac as insurer passes to another body which is more active in protecting its interests. It may be that the insurance simply disappears and that the immediate result is the downgrading of the underlying Punch debt by rating agencies. This will precipitate the discussion between debt representatives and other (esp. Equity) representatives. What is the likely result of this? Either (1) Debt holders demand additional equity injection to prevent longer term default probability or (2) Debt holders agree on some form of ‘haircut’, or, as per 2009, sell out at a significant discount.
We wrote two years ago that: “it might have seemed clever back in 2006 to securitise 97 per cent of your assets. In 2008, not so much.” That’s more true than ever as the remnants of the subprime structured finance world plod towards their graves.
Ambac’s funeral drinks will presumably not be held at one of Punch Tavern’s pubs.
(Punch Taverns, incidentally, is not the only example of a British business being monoline-mauled. Despite its protium programme, Barclays still has some bond insurer exposure as detailed here, here, or here. It reports next week.)
Related links:
A rough history of British securitisation 2003-2008, Punch edition – FT Alphaville
Punch Taverns’ cliff risk – FT Alphaville
Over a barrel; off a cliff – FT Alphaville