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Bond Insurers

Ambac Close to an Agreement on Monorail

Ambac Assurance Corp. is close to reaching a settlement that would wipe away more than $500 million of exposure to revenue bonds issued by the Nevada Department of Business and Industry for the Las Vegas Monorail, according to its regulator Thursday.

“We’re very close on negotiations with the Las Vegas Monorail to reach a commutation,” said Sean Dilweg, head of Wisconsin’s Office of the Commissioner of Insurance.

He said the proposed settlement with the monorail bondholders is similar to an agreement reached in the summer with the Weinstein Co., a troubled film studio which had a $500 million loan insured by Ambac. In the agreement approved by the Wisconsin courts in June, Ambac paid $115 million in cash and surplus notes to release it from insuring the studio’s debt.

How much Ambac might pay to clear its exposure to the bankrupt monorail has not been disclosed.

Dilweg placed the monorail credit, along with about 700 other risky policies covering a net par outstanding amount of about $50 billion, into a walled-off account last March. The insurer’s exposure to the transit system is the single-largest muni credit in the account.

Claims in the separate account were temporarily frozen to stop Ambac Assurance from hemorrhaging more than $150 million a month, as its portfolio of residential mortgage-backed securities was deteriorating rapidly. The continuous losses threatened to dry up the company’s claims-paying abilities and leave policyholders of longer-duration debt with a worthless guarantee.

Dilweg, whose tenure expires in January, is currently seeking approval of a rehabilitation plan for the walled-off assets that he filed in October. The plan offers policyholders a quarter of their permitted claims in cash and the rest in notes backed by the insurer’s surplus. The notes bear a 5.1% coupon and mature in 2020.

“If you have a security that is paying out $100,000 each month on an RMBS, you would get $25,000 in cash and $75,000 in surplus notes [each month],” Dilweg said.

The rehab plan was under review last week by a state court in Dane County, Wis. The court is expected to come to a decision by Nov. 30, and Dilweg hopes the separate account could begin paying claims as early as January.

Kimberly Shaul, deputy commissioner at the OCI, said a commutation agreement is a possibility for all policyholders in the segregated account, not just the monorail credit.

“All policyholders in the segregated account will be paid in accordance with the rehabilitation plan, if it is approved,” she said. “But if, because of business or economic reasons, they want to close off the risk, we can consider a commutation agreement.”

The potential settlement comes at a tumultuous time for Ambac, which for decades was the second-largest municipal bond insurer.

Ambac Financial Group, its parent, rushed into bankruptcy protection earlier this month to avoid a tax dispute with the Internal Revenue Service. The IRS was seeking information about how it calculated the size of tax refunds which it already received, totaling $708 million.

Debtholders of Ambac Financial cannot access the assets of Ambac Assurance, but the IRS is unique in that it has the power to obtain a lien on the liquid assets of the holding company and all its subsidiaries.

Ambac Assurance held $6.8 billion of assets as of Sept. 30. To protect those assets, Dilweg on Nov. 7 allocated into the segregated account any liability that Ambac Assurance may have to the IRS or the Treasury. The parent filed for bankruptcy the next day.

If the two events were reversed, it would have been “very problematic” for Ambac Assurance, he said.

Under Wisconsin insurance law, there are six classes of preferences in rehabilitation, led by administrative costs and policyholder claims. Dilweg’s role is to treat policyholders first, shareholders last. Tax-related claims are subordinate to policyholder claims, so the concern with the IRS getting involved was that it could potentially override his priorities.

“The last thing we wanted to see was a situation where a bankruptcy court would jump over the policyholder and draw down assets of the insurance company,” Dilweg said. “We have not allowed a payment up to the holding company in 18 months — that’s why they are going bankrupt. So the last thing I wanted was for shareholders reaching down into the insurance company.”

Ambac Financial, which was delisted from the New York Stock Exchange last week, relies on revenue from the insurer to operate.

Subordinating the IRS claims into the segregated account has some precedent in the federal McCarran-Ferguson Act of 1945, Dilweg said. The act gives states the authority to regulate insurance businesses without interference from most federal regulations.

“All issues related to insurance are state regulated,” Dilweg said. “The federal government can’t trump that.”

The tax refunds previously collected by Ambac Financial went directly to the general account of Ambac Assurance, based on a tax-sharing agreement that Dilweg said dates back to 1991. He said he is “very confident” the insurer will be able to keep the tax refunds.

If the pending rehab plan is rejected by the Wisconsin court, Dilweg would presumably have to come up with a tweaked plan, guided by the state judge. The judge has already approved an outline of the rehabilitation and issued an injunction on the RMBS payments, so there is reason to be confident that the more detailed plan will be accepted.

“He’s shown great deference to the administrative agency,” Dilweg said of Judge William Johnston. “He’s looking to us to really prove the due diligence that we’ve done.”

Once the plan is in place, the state court would review the 1:3 cash to notes ratio every June and make adjustments depending on where Ambac’s balance sheet stands and how quickly its portfolio is deteriorating.

“In two years, people could be getting 50 cents in cash and 50 cents in notes,” Shaul said. “The whole plan has developed to give us flexibility, because no one can predict what our economic future is going to look like over time. This is a perfect methodology to allow for that flexibility.”

In other Ambac news, the insurer said Thursday it would be reviewing RMBS loans and seeking putbacks — or compensation from mortgage loan originators — where warranted.

Ambac's former competitors, MBIA Inc. and Assured Guaranty Ltd., are each seeking to recover billions of dollars from putbacks.

“AAC believes, based on its review, that the sponsors of these securities are obligated to pay sums, which may in certain cases be material, to the issuers of some or all of the RMBS,” Ambac Assurance wrote in a filing to the Securities and Exchange Commission.

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