The office of the Wisconsin insurance commissioner ordered troubled bond guarantor Ambac Assurance Corp. to deposit the more toxic holdings of its insured portfolio into a newly-created account that the office will administer.
Ambac’s municipal bond portfolio was valued at $230 billion last September, according to third-quarter financial statements. The decision to separate that portfolio from riskier holdings is intended to protect policyholders from the rapid outflow of cash owed to holders of the deteriorating quality of residential mortgage-backed securities, according to Sean Dilweg, the Wisconsin commissioner.
“My obvious concern here is you had short-tail losses in the RMBS book eating away the claims-paying ability for the larger muni book that may not be coming due until later — you know, 20 years out,” Dilweg said.
According to Harold Horwich, a partner at Bingham McCutchen LLP who is representing 12 mutual funds seeking to be part of any restructuring negotiations, Ambac Assurance has been losing between $100 million and $150 million each month recently.
Dilweg said the move was needed. “I felt as I was tracking the assets that it had reached a point of becoming financially hazardous. It was important not to allow the RMBS payments to continue at 100 cents on the dollar,” he said.
The move yesterday led the stock of parent Ambac Financial Group to fall as much as 22% yesterday and close down 17.0% at $0.661.
Dilweg said the segregated account includes roughly $35 billion of insured assets. Those will enter rehabilitation “in order to facilitate an orderly run-off and/or settlement of those specific liabilities,” a company press release said yesterday.
Any claims that are owed from the segregated account will not be paid, but a rehabilitation court in about six months will determine what amount the holders of those assets should be compensated.
The account is supported by a $2 billion secured note issued by Ambac Assurance. As the segregated account winds down, any additional value that accrues will be deposited back to the policyholders via the general account.
“We put durable coverage in place — in a sense, the playing field has been set and the municipal book is in a very stable position,” Dilweg said.
Standard & Poor’s, however, said the decision “will lead to concern that it favors one class of policyholders over another.” The rating agency downgraded Ambac’s counterparty credit, financial strength, and financial enhancement to R from CC, indicating regulatory intervention.
Analyst Rob Haines from CreditSights noted there was confusion about whether the claims-paying moratorium on the segregated assets would trigger a credit event.
“While this may seem like a clear failure to pay or repudiation/moratorium credit event ... we note that the moratorium is not being imposed on Ambac Assurance itself but rather the segregated account containing the seized liabilities,” he wrote.
Haines also said “the seizure comprised only a relatively modest amount of liabilities,” noting that as of September 2009 the par amount insured by Ambac was $409 billion.
The insurer’s parent, Ambac Financial, also said in the release that it may seek “a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding.” However, it said it should have “sufficient liquidity to satisfy its needs through the second quarter of 2011,” a slightly more optimistic statement than its 10Q filing in November when it said liquidity could dry up before that time.
Ambac Financial last week postponed releasing its fourth-quarter and year-end earnings. It attributed that delay to ongoing discussions with counterparties involved in structured finance transactions, in particular collateralized debt obligations of asset-backed securities.
The discussions have led to a nonbinding agreement in which Ambac Assurance will pay $2.6 billion in cash plus $2.0 billion of newly issued surplus notes to tear up “substantially all of its remaining” CDO of ABS contracts, according to the chairman of Ambac Financial’s board of directors, Michael Callen.