Ambac's Interest Payment Bid Denied

Regulators denied Ambac Assurance Corp.’s requests that it be allowed to pay interest on all its outstanding surplus notes due June 7.

The Wisconsin Commissioner of Insurance told Ambac and the rehabilitator in charge of overseeing the bond insurer’s segregated account of claims that it “disapproved the requests.”

Ambac Assurance and the rehabilitator had made separate requests to pay notes owed for policies held in the general and segregated accounts. Payments for claims in the segregated account have been delayed twice, with the regulator first saying payments could be made in May, and then pushing it back to June. Interest payments on the general account will come due on June 7 and they are being delayed for the first time.

Wisconsin-based Ambac Assurance was once the second-largest municipal bond insurer until it ran into serious trouble in late 2007 because of decaying credit quality in its structured finance policies, which included contracts committing it to cover losses on mortgage bonds and credit default swaps. Ambac’s parent company has filed for bankruptcy protection from creditors.

After losses hit $150 million a month in 2010, regulators created a segregated account in March of that year for the bond insurer’s most troubled assets. Some $50 billion worth of assets were placed in the walled-off account. The regulator subsequently came up with a plan of rehabilitation that granted distressed policyholders 25% of their claims in cash and the rest in notes to be paid with any surplus funds. The notes mature in 2020.

The regulator “is continuing to evaluate whether certain amendments to the plan of rehabilitation for the segregated account and/or the initiation of rehabilitation proceedings with respect to Ambac Assurance Corp. would preserve tax attributes for the benefit of policyholders,” a spokesman said. “In light of this uncertainty, among other reasons, the commissioner has determined that it is in the best interest of policyholders as a whole to not permit the payment of accrued interest on the surplus notes at this time.”

A spokesman for Ambac said the monoline insurer will compound the interest on the surplus notes in accordance with their terms and make principal and interest payments when the regulator approves such payments.

The regulator, in a status report filed with the court overseeing the rehabilitation of the segregated account, said due to tax concerns that could have a detrimental effect, it is considering “the elimination of the issuance of surplus notes by the segregated account and-or the imposition of transfer restrictions on any surplus notes issued by the segregated account.”

The segregated account contains one high-profile municipal bond issue, $450 million of defaulted bonds issued for the Las Vegas monorail.

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