Bond insurer Ambac Assurance Corp. has sued the Adelanto Public Utility Authority in California, saying the issuer failed to take steps to prevent a swap it entered from being terminated and has now left the bond insurer liable for the payment.
The authority failed to find a new insurer or obtain its own investment-grade rating after Moody’s Investors Services downgraded Ambac — which insured the swap — to Baa3 last November, giving swap counterparty Piper Jaffray Financial Products Inc. the right to terminate it, the lawsuit says. Adelanto repeatedly rebuffed efforts by Ambac and Piper Jaffray to work out a solution, leading Piper to terminate the swap by notice June 1, according to the suit.
Ambac has the right to be reimbursed for all “fees, costs, and other expenses incurred by it which are related to or result from breach by the authority of its obligations under the swap agreements,” the insurer said in the lawsuit filed in federal court for the Southern District of New York.
“Simply put, Ambac is asking the court to confirm the authority is obligated to make the termination payment as represented in the swap agreement and opinions received at the time of the swap closing in 2005,” an Ambac spokesman said in an e-mail.
The lawsuit relates to $70.6 million of variable-rate refunding bonds Piper Jaffray & Co. underwrote for the Adelanto authority in 2005. Adelanto entered into an interest-rate swap agreement with Piper Jaffray Financial Products and Ambac issued a surety bond to guarantee all payments.
After Ambac was downgraded, Piper held off on terminating the swap agreement, instead trying to “resolve the situation amicably,” the lawsuit said. Although Piper preferred to forbear on the termination, the authority failed to take steps to “resolve the financial difficulties.”
Representatives for the authority did not returns calls seeking comment, but told Bloomberg LP earlier this week that Ambac’s downgrade caused an “absolute drain” on the authority’s cash. Rates on the bonds jumped to 12% from 4% after Ambac got downgraded.
Ambac alleges that the authority failed to file timely audited financial statements the past two years. The authority also rejected Ambac’s offer to help pay for the cost of hiring an independent consultant to help develop a plan for the finances to avoid swap termination, the lawsuit says.
Piper June 1 sent notice terminating the swap contracts, with the authority owing it a termination payment of about $6 million. Ambac expects the authority will not pay, leaving the bond insurer responsible for the payment, the lawsuit says.
“The authority has had numerous opportunities to avoid having to pay the termination payment, but it has spurned those opportunities,” the lawsuit said. “By consistently refusing to cooperate with either Ambac or Piper, the authority has invited Piper to exercise its right of termination and to demand the termination payment pursuant to the swap agreement.”
Piper Jaffray did not return requests for comment.