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Ambac Warns of Liquidity Shortage, Possible Bankruptcy Filing

Ambac Financial Group, parent of bond insurer Ambac Assurance Corp., warned that its liquidity could dry up before the second quarter of 2011 and that it may have to file for bankruptcy protection, according to its third-quarter 10Q filing. The company said current liquidity is “currently insufficient to fund its needs beyond the near term.”

Ambac is attempting to respond to the issue by developing new strategies but the situation is such that the failure to successfully execute one of the strategies “could result in it running out of liquidity by the first quarter of 2011 or potentially sooner,” the company said in its quarterly 10Q filing lodged with the Securities and Exchange Commission Monday.

“No assurances can be given that Ambac will be successful in executing any or all of its strategies,” the report said.

When the company reported $2.2 billion in third-quarter profits last week, its earnings statement left out the key number investors were after, its statutory capital — defined as assets in excess of liabilities, subject to certain statutory adjustments. In the more comprehensive 10Q report, the company reiterated that its calculations were “not yet completed.”

Ambac Assurance Corp. is not allowed to pay dividends to the parent company in 2009 and “will likely be unable to pay dividends in 2010, absent special approval” from the company’s primary regulator, the Wisconsin commissioner of insurance, the statement said.

Rob Haines, an analyst with CreditSights, said the explicit mention of a ­possible bankruptcy comes as no surprise to anyone following the story, as stock in the company has fallen 98.8% since October 2007. Still, given the counterparty risk involved in a bankruptcy, Haines said that scenario has to be avoided at all costs.

“If the regulators said they cannot make payments on policies anymore, that would trigger an event of default under the [credit default swaps] contracts at the [operating company],” he said.

 “I don’t think it makes sense for anybody to have a complete blow-up of the company — not the regulators, not the company, not the policyholders,” he added. “They don’t want to trigger the nuclear event, which is regulatory seizure whereby the CDS contracts are marked and that would be part of the liabilities due. No one wants that.”

Ambac stock fell 33.1% yesterday to finish at $0.79.

Meanwhile, after Tuesday’s closing bell, Assured Guaranty Ltd., parent of bond insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp., announced it was expecting to report a net loss of $35 million, or 22 cents per share, for the third quarter. The full earnings filing is expected to be released Monday.


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