In its quarterly filing on Monday, Ambac Financial Group (ABK) revealed that it is facing liquidity constraints. At the end of the third quarter of 2009, the company’s liquidity consisted of $164.7 million of cash, short term investments and bonds. Management is unsure whether this will be sufficient for its liquidity needs through the second quarter of 2011.
Ambac’s access to other sources of liquidity also remains uncertain. The company has a $143.0 million debt payment obligation maturing in Aug 2011. Furthermore, an unfavorable outcome of the outstanding class action lawsuits against Ambac could cause additional liquidity strain. Given the company’s current condition, it is possible that its liquidity may run out prior to the second quarter of 2011.
Ambac, the first monoline bond insurer, had never been downgraded or defaulted prior to 2007. In 2007, amid a housing market decline, defaults soared to record levels on subprime mortgages and innovative adjustable rate mortgages, which had been issued in anticipation of continued rises in house prices. The company posted losses as insured structured products backed by residential mortgages appeared headed for default.
Ambac has suffered multiple rating downgrades from June 2008 through August 2009. Its principal operating subsidiary Ambac Assurance rating stands at Junk status, “CC”. The financial strength rating downgrades have adversely impacted Ambac’s ability to generate new business and had negatively affected its operating and financial results. As housing market conditions have deteriorated and the illiquidity in the mortgage markets has become more pronounced, the company has experienced an increase in foreclosure loans.
Ambac is developing strategies to address its liquidity needs. Such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. However, given the state of credit markets, it is unsure that Ambac will be successful in executing any or all of its strategies. If the company is unable to execute these strategies, it will consider seeking bankruptcy protection without creditor’s agreement, pertaining to a plan of reorganization.
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