Ambac Financial Group said in a regulatory filing Monday that it may be forced to file for bankruptcy by Dec. 31 due to its inability to raise fresh capital.
The insurance holding company has warned several times over the past year that it could seek a pre-packaged bankruptcy plan in early 2011. By failing to pay a $5.9 million interest payment owed Monday, Ambac could seek bankruptcy protection before year’s end.
Helen Remeza, senior analyst at Moody’s Investors Service, said a pre-packaged bankruptcy will have limited impact on policyholders. That group includes those holding bonds wrapped by Ambac’s primary insurer subsidiary, Ambac Assurance Corp. — a distinct regulated entity.
When insurance holding company Conseco filed for bankruptcy in 2002, its life and health insurance subsidiaries continued to operate, according to Remeza. The holding company didn’t re-emerge for nearly a year, but the insurance operating companies were still there when it did.
“For insured bonds, this shouldn’t be any news,” said Remeza, who wrote about the possibility of this scenario in June. “From a credit perspective, Ambac’s policyholders are unlikely to be affected by holding company default.”
Ambac, or the American Municipal Bond Assurance Corp., was the first company to offer municipal bond insurance in 1971. The industry would eventually peak in 2005 with nine competitors wrapping 57% of new municipal debt, before most of them collapsed from insuring toxic assets from outside the world of public finance. The percentage of new muni issues that are insured fell to 7% this year.
Assured Guaranty Ltd., the only insurer to survive the crisis, was stripped of its sole triple-A rating last week by Standard & Poor’s. The news of a possible Ambac bankruptcy was received with little fanfare within the muni bond market.
“I don’t think this is a shock to anyone who currently is involved in the municipal market,” said Mike Pietronico, chief executive of Miller Tabak Asset Management in New York. “This is the road they were heading down.”
Ambac’s stock value, which dropped 50% to $0.41 Monday, had already fallen more than 99% from May 18, 2007, when shares peaked at $96.08 each.
Ambac Financial is rated CC by Standard & Poor’s and C by Moody’s, while Ambac Assurance is rated R, indicating regulatory intervention, and Caa2.
Pietronico said he wouldn’t expect the trading value of Ambac-wrapped debt to change due to the pending bankruptcy.
Since the financial crisis — when Ambac Assurance was downgraded to junk because of its deep exposure to toxic mortgage-related assets — most of the bonds it insures have traded on their underlying credit value.
“Are we going to be seeing people bid Ambac-insured bonds differently today than last week? I don’t think so,” Pietronico said. “The market believed they were a non-entity and the announcement today doesn’t change the way the bonds will be bid.”
Ambac Financial announced the news by notifying the Securities and Exchange Commission. The holding company said if the interest payment is not paid within 30 days, an event of default will occur. The bonds, issued in 1993 with a par value of $75 million, have a 7.5% coupon maturing in May 2023.
The 2023 bonds last traded on Oct. 26 at 36 cents on the dollar, offering a yield of 23.5% and a spread of more than 2,000 basis points over comparable Treasuries.
At the end of the second quarter, Ambac Financial’s total indebtedness was $1.622 billion. The next scheduled payment of interest on the company’s indebtedness is Nov. 15. Ambac’s total interest expense on long-term debt was $44.4 million in the first two quarters, according to its most recent financial statements.
“If the company is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy under Chapter 11 of the United States Bankruptcy Code prior to the end of the year,” Ambac said in a filing signed by David Trick, chief financial officer.
The Wisconsin Office of the Commissioner of Insurance, which regulates the insurer but not the holding company, declined to comment. A spokesman for Ambac Assurance also declined comment.
Implications for Ambac debt holders are more direct. The company said a default would permit them to accelerate the maturity of all of the company’s indebtedness.
Over the next month, Ambac Financial said it intends either to pay interest on the 2023 notes or solicit acceptances for a prepackaged plan of reorganization. If the solicitation succeeds, it will either file for bankruptcy with a related pre-packaged plan or file under Chapter 11.
A pre-packaged plan could help the company maintain a $7 billion net-operating loss tax carry forward, which it calls “a valuable asset.” However, that asset could be placed at risk by a change of ownership as defined under section 382 of the Internal Revenue Code of 1986.
An ownership change would occur if shareholders owning at least 5% of the company’s stock increased their percentage ownership by more than 50%. Ambac took precautionary measures in February to reduce the risk by entering into a tax-benefit preservation plan.
The only institutional holders of the outstanding debt are the Catholic Aid Association, the Croatian Fraternal Union of America, the Greater Beneficial Union of Pittsburgh, the Texas Directors Life Insurance Co., and the Czech Catholic Union, according to Bloomberg LP.