BRADENTON, Fla. — After more than a year of negotiations, New Orleans has filed an amended complaint in its federal suit against Ambac Assurance Corp., Ambac Financial Services LLC, PaineWebber Capital Services Inc., and UBS Securities LLC.
Filed in the U.S. District Court’s Eastern District of Louisiana on Dec. 23, the amended complaint consists of 77 pages and eight counts. The original 40-page complaint contained four counts and was filed July 17, 2008.
In the latest complaint, New Orleans’ attorneys detailed claims that included breach of contract, fraud, negligent misrepresentation, breach and tortuous interference with a swap as well as remarketing agreements, and detrimental reliance on credit enhancement with respect to the city’s $171 million of taxable firefighters’ pension bonds sold in 2000 as variable-rate demand obligations.
Although the city continues to make its payments, approximately $128 million of the pension bonds are outstanding now and they are being held by JPMorgan, the liquidity provider.
At the time the original complaint was filed in July 2008, the city’s suit said it was paying 10.5% interest on the bonds or approximately $400,000 a month more in debt service than it paid before the remarketing failure due to the credit crunch and bond insurer downgrades.
The penalty bank rate actually is variable and is based on whichever is higher, the federal funds rate or JPMorgan’s prime rate plus 1%.
The city also faces exposure in a related swap, which originally was with a UBS affiliate PaineWebber, in which the city agreed to pay a fixed rate of 6.95%. Given the turmoil in the bond market, the cost of the swap to the city has reached over $60 million.
In its response to the original suit and a motion to dismiss the case, Ambac said its sole duty as an insurer was to pay the principal and interest payments on the variable-rate demand bonds if the city defaulted.
The policy — and all others it wrote — made no promises Ambac would avoid backing structured finance products or maintain its credit rating, nor did it promise credit enhancement, the insurer said.
The city’s amended complaint contains more explicit allegations and attempts to clarify that other than credit enhancement there is no reason for a variable-rate issuer to buy insurance, said a source familiar with the city’s case who did not want to be identified.
Credit enhancement — which in New Orleans’ case raised the underlying triple-B credit rating to triple-A based on insurance — was necessary to lower the city’s interest rate and help maintain the pool of qualified investors, which included money market fund buyers that could only invest in bonds with double-A or higher ratings, the source said.
“The insurance policy really does no good unless the carrier maintains financial credibility,” said the source, who added that the city entered the contract essentially to “rent” the insurer’s balance sheet.
Attorneys for the defendants could not be reached for comment by press time.
Before federal Judge Peter Beer could rule on Ambac’s motion to dismiss the case, a joint motion was filed in October 2008 requesting proceedings to be stayed to negotiate a possible settlement.
Last April, the case was reassigned to Judge Kurt Engelhardt, who extended the stay in May.
A third request for a stay filed last November was denied by Engelhardt, who ordered amended pleadings to be filed by Dec. 23. The defendants have until Feb. 2 to file responses.