SAN FRANCISCO — After collecting more than $104 million from the Bay Area Toll Authority in return for terminating a swap agreement, Ambac Financial Services LLC sued the agency this week seeking an additional $50 million.
Oakland-based BATA is a government agency that operates seven state-owned toll bridges in the San Francisco Bay Area. In July, it terminated $1.1 billion of swaps with Ambac Financial, a unit of bond insurer Ambac Financial Group Inc., because the bond insurer’s credit ratings had fallen to junk status.
Ambac
“BATA breached the swap agreement by the manner in which it pursued the market quotation method because it did not seek in good faith to obtain genuine quotations for transactions that were economically equivalent to the terminated transactions,” Ambac lawyer David W. Dykhouse, of Patterson Belknap Webb & Tyler LLP, wrote in a court filing.
“Rather, it sought indications of the amount of termination values for the terminated transactions, thereby frustrating the purpose of the market quotation method of obtaining genuine market quotations, subject to the discipline of such quotations being actionable,” he said.
BATA disclosed the lawsuit just before coming to market earlier this week with $784 million of debt that refinances a portion of the variable-rate debt tied to the terminated swaps.
“The authority believes that it paid [Ambac Financial Services] the full amount due under the agreements,” BATA said in a disclosure supplement. “The litigation will not have a material impact on the authority’s financial position.”
BATA chief financial officer Brian Mayhew said he could not comment on the content of the lawsuit until the authority’s lawyers and board decide how to respond. A spokeswoman for Ambac did not return calls seeking comment on the case.
According to court documents, BATA and Ambac entered into six swap agreements in 2002, 2004, and 2005. Under the agreements, BATA hedged its variable-rate debt exposure by paying fixed rates to Ambac in return for a flow of variable-rate payments.
BATA terminated the swaps on July 22 and paid $104.6 million to exit the deal.
Both sides agree that Ambac’s credit woes allowed BATA to terminate the swaps. Ambac’s credit ratings have fallen from triple-A to junk status in the span of just over a year, as the insurer’s losses on mortgage-backed bonds mounted.
On July 28, Standard & Poor’s downgraded Ambac Financial’s counterparty rating to CC with a negative outlook from BB. Moody’s Investors Service cut the company’s senior unsecured debt rating to Ca from Caa1 the next day.
The company lost $2.4 billion in the second quarter and wrote no new business. Earlier this month Ambac tapped its contingency reserves — money set aside to pay claims — to meet regulatory capital requirements.
The company’s weakness means that BATA had a right to terminate its swaps under their agreements, but Ambac says BATA owed at least $156.6 million.
The parties’ swap agreements required BATA to use the market quotation method to value swap termination payments. But Ambac believes the agency improperly applied the valuation procedures, triggering a different valuation method called “loss.”
The loss method is a calculated termination payment. It is the difference between the present value of Ambac’s variable-rate payments and BATA’s fixed-rate payments. Such calculations require assumptions about the future path of short-term interest rates and a discount rate for determining present value. Ambac did not say what assumptions it had used.
The insurer said that the large difference between its estimated value of the swaps and the market quotations obtained by BATA suggests the toll bridge operator didn’t make a good faith effort to get accurate pricing.
“The insufficient amount is so shockingly below the correct amount and so materially disadvantages Ambac, relative to loss, that it is commercially unreasonable,” Dykhouse wrote in Ambac’s filing.
