SAN FRANCISCO — When Wisconsin’s insurance regulator divided Ambac Assurance Corp.’s insurance portfolio into good and bad policies last week, municipal bonds issued for the bankrupt Las Vegas Monorail were the only muni debt placed into the Ambac rehabilitation account, which consists largely of the toxic mortgage-related securities that brought the company to its knees.
Ambac wrapped $451 million of tax-exempt monorail first-tier revenue bonds in 2000, issued by the Nevada Department of Business and Industry to finance construction of the four-mile long Las Vegas Monorail.
The nonprofit operator of the monorail filed for Chapter 11 bankruptcy in January, in the face of ridership and revenue numbers that leave it nowhere near able to pay its debt service.
The monorail bonds were part of $35 billion of toxic securities Wisconsin insurance commissioner Sean Dilweg ordered placed into the segregated account.
Dilweg received court approval for a temporary moratorium on claim payments for policyholders in the segregated accounts until a rehabilitation plan is approved in court.
“It therefore seems likely that Ambac will fail to honor claims against the surety bond and the bond insurance policy, which will result in a payment default on the first-tier bonds on July 1,” Wells Fargo, trustee for the monorail bonds, said in a disclosure statement posted Friday on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access site.
Once the rehabilitation plan is approved, policyholders in the segregated accounts are expected to receive claim payments split between cash and a share of a $2 billion secured note issued by Ambac Assurance, according to a source familiar with the Wisconsin regulator’s plans.
After the monorail declared Chapter 11 bankruptcy, attorneys for Ambac and Wells Fargo filed objections.
They argued that the Chapter 11 case should be dismissed and said any bankruptcy proceedings should be conducted under Chapter 9 for municipalities because the monorail was effectively an instrumentality of the state government.
More than five weeks after hearing those arguments in court, the judge has not yet ruled on them, said Ambac’s attorney, McDermott Will & Emery LLP partner William Smith.
The monorail, which connects several hotels on or near the Las Vegas Strip, has been able to cover its daily operating costs and continues to operate.
It was only able to make its previous debt-service payment in January by drawing on nearly all of its remaining Ambac surety policy, according to the Wells Fargo disclosure statement.
The first-tier monorail bonds originally carried triple-B-minus level underlying ratings from the three major rating agencies, in addition to the Ambac insurance. Subordinate tiers came unrated and uninsured.
The Wisconsin Office of the Commissioner of Insurance has set up a dedicated Web site, www.ambacpolicyholders.com, to provide a document repository and to answer policyholders’ questions.