On Wednesday, Ambac Financial Group (ABK) once again announced that it might seek bankruptcy protection as it could default on its debt. Previously, in November 2009, Ambac had announced that it might file for bankruptcy protection if it fails to pull through its cash position. The company reiterated the warning after Wisconsin took control of some of its worst-hit assets in March 2010.
Ambac’s fears seem to have materialized; the company is apprehensive that it will not be able to cover its operating expenses and debt service obligations after the second quarter of 2011. It also expects to discontinue interest payment on its debt from the second quarter of 2010. This could further accelerate the maturity of outstanding debt, impelling it to raise new capital, restructure debt or pursue a bankruptcy filing without forming a reorganization plan.
An ad hoc bondholders’ committee, which includes hedge funds Centerbridge Partners, Halcyon Capital Management, Mangrove Partners and Camden Asset Management, may use a preplanned bankruptcy to exchange their debt for equity in the company.
Ambac is primarily dependant on dividends and other payments from its principal operating unit, Ambac Assurance Corporation (“AAC”), and on the residual value of AAC to meet its financial obligations. However, Ambac remains doubtful about AAC’s ability to make dividend payments to the company in the near future.
Ambac has been neck deep in trouble for quite some time following the collapse of the U.S. housing market. The company has suffered multiple rating downgrades, adversely impacting its ability to generate new business. To add to its woes, the state of Wisconsin took control of some of AAC’s worst-hit assets (worth $64 billion) in March 2010 to protect the policyholders of the company’s more stable business − insuring municipal bonds.
On June 7, 2010, Ambac commuted $16.4 billion of exposure to collateralized debt obligations (CDOs) of asset-backed securities for $2.6 billion in cash and $2 billion of new surplus notes, implying approximately 16 cents on the dollar in cash and just over 12 cents on the dollar in new debt. Also, Ambac converted certain non-CDOs of asset-backed securities worth approximately $1.4 billion that were commuted for a cash payment of $96.5 million.
Ambac also intends to convert certain other non-CDOs of asset-backed securities worth $1.5 billion for a maximum amount of approximately $115 million of cash plus $60 million of surplus notes of AAC. This commutation is expected to benefit the remaining policyholders.
Shares of Ambac plummeted 39.3% to close at 65 cents on Wednesday after the company announced its concerns.
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