Bond insurer Ambac Financial Group Inc. (ABK) on Tuesday warned that it may be forced to seek bankruptcy protection if it cannot improve its liquidity position. The company said that a result of the deteriorating financial condition at its main bond insurance unit Ambac Assurance Corp., regulators could commence delinquency proceedings to protect the interests of its policyholders. Shares of the company plunged 33% in the regular trading session following the news.
In a filing with the U.S. Securities and Exchange Commission late Tuesday, Ambac said that although it has sufficient liquidity to satisfy its needs through the second quarter of 2011, its available liquidity is currently insufficient to fund its needs beyond the near term and failure to successfully execute on its current strategies could result in it running out of liquidity. Ambac said that based on the holdings of cash, short term investments and bonds of $164.7 million as of September 30, 2009, it will have sufficient liquidity to satisfy its needs through the second quarter of 2011. The company added that no guarantee can be given Ambac Assurance will be able to dividend amounts sufficient to pay all of Ambac's operating expenses and debt service obligations in the long-term, or that Ambac will be able to access alternative sources of capital.
The company noted that Ambac Assurance is unable to pay dividends in 2009 and will likely be unable to pay dividends in 2010 without special approval from its main regulator, Wisconsin's Office of the Commissioner of Insurance, thus constraining Ambac's principal source of liquidity.
According to the company, Ambac Assurance might not be able to pay all of its operating expenses and debt service obligations thereafter, including a payment of $143 million in August 2011. The company added it was possible Ambac Assurance's liquidity may run out prior to the second quarter of 2011.
Ambac noted that Ambac Assurance has not yet completed its statutory financial statements for the third quarter of 2009. Further, the company said that the unit's statutory capital and surplus has reduced "significantly" due to losses on exposures to residential mortgage backed securities, including financial guarantee insurance policies and credit default swap contracts on collateralized debt obligations of ABS securities.
Ambac said that regulators have increased its oversight of Ambac Assurance due to the deterioration of the unit's financial condition and is evaluating its ability to pay all claims in its insured portfolio. The company noted that the regulators could decide to initiate delinquency proceedings with respect to Ambac Assurance to protect the interests of its policyholders. Such proceedings could trigger termination payouts of $23.11 billion by its insurance unit on credit-default swap contracts, the company said.
Ambac said, "Ambac is developing strategies to address its liquidity needs; such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. No assurances can be given that Ambac will be successful in executing any or all of its strategies. If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups."
Ambac was stripped of its AAA credit ratings last year and has stopped writing new business. Last week, the company reported a profit for the third quarter compared to a loss last year, helped by significant unrealized mark-to-market gains on credit derivative contracts. Net income attributable to Ambac Financial for the third quarter was $2.19 billion or $7.58 per share, compared to net loss of $2.43 billion or $8.45 per share in the prior-year quarter. Total revenues for the quarter were $2.69 billion, compared to negative revenues of $2.32 billion in the same period last year.
ABK closed Tuesday's regular trading session at $0.79, down $0.39 or 33.05% on a volume of 110.28 million shares.
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