Sell Side

Ambac to Pay Supplements as Vegas Monorail Holders Wait

Ambac Assurance Corp. will make supplemental payments on some policies in a segregated account that the company established to hold troubled liabilities during its bout with bankruptcy. Las Vegas monorail bonds, the only large municipal policy in the account, won’t see any additional payments.

A Wisconsin court approved a motion filed by the rehabilitator of the segregated account to permit Ambac to make cash payments in excess of 25%, the amount it has been paying on principal and interest claims from the account since a September 2012 court decision, the bond insurer announced on Friday. The bankruptcy-emergent financial guarantor said it anticipates the supplements will be paid on 14 residential mortgage-backed security policies beginning this month.

“If we pay a higher cash percentage of certain segregated account claims, we can trap the additional reimbursement amount before it leaks from the trust,” Ambac managing director Michael Fitzgerald said in an email. “In the end, we expect to recover more proceeds by making the supplemental payments, and this will serve to benefit all policyholders.”

Supplemental payments will be made on a case by case basis in lump sums or varying proportions of all or a portion of outstanding unpaid claims, Ambac said. Payments on fourteen RMBS transactions will help capture cash flows from those claims, Fitzgerald said.

The segregated account, set up in March 2010 to contain an original $50 billion in net par of exposure of around 700 poorly performing assets, did not pay claims for over two years until the 2012 court order. Ambac, which went into Chapter 11 in November 2010, also included defaulted municipal debt issued for the Las Vegas monorail shuttle service into that account.

Las Vegas monorail bonds are not currently on the list to receive supplemental payments, Fitzgerald said. Some owners of the monorail debt have objected to their original placement in the segregated account and now say their exclusion from supplemental payments is discriminatory.

“With this new motion, instead of providing the same treatment for all holders of permitted claims against the segregated account, the rehabilitator once again seeks relief which will discriminate against the LVM bondholders,” Eaton Vance said in an objection last week before the court ruled in favor of Ambac. 

The monorail went bankrupt in January 2010 as tourism to the country’s gambling capital dwindled, ultimately leaving Ambac with over $1.16 billion in future principal and interest exposure. While over 80% of the original monorail creditors chose to settle for a cash tender offer in 2011, at least a dozen bondholders including Eaton Vance are awaiting an appeal filed in 2011 challenging their placement in the RMBS-laden account.

“Eaton Vance continues to believe, as put forth in the case currently pending in the Wisconsin Court of Appeals, that the Las Vegas Monorail bonds were improperly allocated to the Segregated Account,” Eaton Vance said in an emailed statement. The company owns about $50 million of monorail bonds in various accounts.

The monorail, structured as a nonprofit enterprise, sold $650 million of bonds rated AAA and insured by Ambac. The high rating attracted some that were looking for a safe investment.

“For us it was a retirement purchase,” a retail investor who owns $500,000 of monorail bonds said in an interview. ”Stock them away in my sock drawer for future retirement. Then they kind of threw us in a corner and said they’ll deal with us later, then they go and make other payments. You cannot discriminate that way.”

A former research analyst and portfolio manager, the Wisconsin-based investor said they were shocked that their state ruled in favor of the insurance company, expressing concern that the decision may set a standard that other guarantors could follow.

“The point of making the supplemental payments is to improve recoveries,” Fitzgerald said. “All policyholders, including the LVM policyholders, will benefit from the higher recoveries. Making a greater distribution to LVM holders wouldn’t result in the same type of recovery.”

Ambac emerged from bankruptcy in May 2013, and says it is exploring opportunities involving the development or acquisition of new financial services businesses. The financial guarantor on July 8 issued a statement objecting to Detroit’s plan to restructure, saying Michigan would make a “grave error” if it supported Orr’s plan to enter Chapter 9.

The firm insures $171 million of Detroit general obligation debt, including $93 million of limited-tax GO bonds and $78 million of unlimited-tax GOs. Ambac said it will honor its clients with full payments of Detroit debt service, the standard practice for policies in the company’s non-segregated account. Total net par of the segregated account was $26.1 billion as of March 31, Fitzgerald said.




Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.