BRADENTON, Fla. - A federal judge has stayed all proceedings in New Orleans' case against its pension bond insurer and remarketing agent because the parties mutually agreed to work on a settlement.
New Orleans on July 17 sued Ambac Assurance Corp. and UBS Securities LLC, claiming the two breached their contracts regarding the city's $171 million of taxable firefighter's pension bonds sold in 2000 as variable-rate demand obligations. The bonds are outstanding in the amount of $139.7 million and are now held by liquidity banks because of failed remarketings.
Ambac failed to provide credit enhancement by maintaining its ratings and UBS failed to take proper steps to remarket the bonds, the city said in its suit, which was filed in U.S. District Court Eastern District of Louisiana.
On Sept. 29, Ambac filed a motion to dismiss the complaint and the city's response was due Nov. 4. UBS' response to the initial complaint was due yesterday. Judge Peter Beer had scheduled oral arguments for Nov. 12 on the motion to dismiss.
"The parties are discussing the possible settlement of the case and believe that a stay of all proceedings, including the Nov. 12, 2008, hearing on the Ambac motion to dismiss, and pending deadlines will aid in those discussions and the efficient resolution of the case," the city, Ambac, and UBS wrote to the judge on Tuesday. "The parties are conducting these discussions in good faith."
Beer ruled Tuesday agreeing to their request to stay the case and all pending deadlines. He also agreed to defer ruling on any pending motion and to continue all hearings until 30 days after the city or the defendants notify the court in writing that settlement discussions have ended.
New Orleans said in its suit that it faces "enormous exposure" as a result of the failure of the credit enhancement purchased from Ambac and UBS' failure as a remarketing agent and it now pays 10.5% interest on the bonds, an increase of 3.55%, or approximately $400,000 a month more in debt service than it paid before the remarketing failure.
The city also is exposed to accelerated amortization and early redemption under the standby bond purchase agreement and a swap, according to court documents.
In its response to the suit, Ambac said its sole duty as an insurer is to pay the principal and interest payments on the variable-rate demand bonds if New Orleans defaulted. The policy - and all others it wrote - made no promises Ambac would avoid backing structured finance products or maintain its credit rating, the insurer stated in a motion to dismiss the case.
A similar discourse is playing out in an Alabama federal court, where Jefferson County has filed a countersuit against Financial Guaranty Insurance Co. and Syncora Guarantee Inc. for failing to provide triple-A rated credit enhancement for the county's variable- and auction-rate sewer debt, most of which is being held by liquidity banks.
