Shares of Ambac Financial Group Inc. plunged 33 percent Tuesday after the embattled bond insurer said it may be forced to file for bankruptcy protection if it cannot improve its cash position.
In a filing with the Securities and Exchange Commission late Monday, the company said it believes it has sufficient liquidity to get through the second quarter of 2011, but warned it could run out of money sooner. The company said it may not be able to generate enough cash to pay operating expenses and debt obligations over the long term and may be unable to access alternate sources of capital given the current state of credit markets.
The holding company's primary subsidiary, Ambac Assurance Corp., cannot pay dividends this year and likely will not pay them in 2010, the company said in the filing. Ambac Financial is considering possibly restructuring its debt through a prepackaged bankruptcy proceeding, but said that if it cannot bolster its capital position it may file for bankruptcy without a lender agreement in place.
"No assurances can be given that Ambac will be successful in executing any or all of its strategies," it said in the filing. "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."
If efforts to turnaround the business fail, its activities may "resort solely to loss mitigation and eventual run-off of the existing book of business," Ambac added.
Ambac was battered by turmoil in the bond market last year.
For years the New York-based company made tidy profits backing billions in municipal bonds that rarely defaulted and paid steady dividends, with little risk. When the housing market boomed, and lenders starting issuing riskier mortgages, investment banks packaged them into complex bonds. For insurers like Ambac and several competitors, the new bonds were an opportunity to generate outsize returns of their own.
But when the housing bubble burst and mortgage defaults spiked, the assets underlying the bonds lost value, increasing the likelihood of issuer default and claims on bond insurance _ putting once rock-solid bond insurers in hot water.
The company has said ratings downgrades have damaged its ability to generate new business and will impact future operations and financial results. Ratings by Standard & Poor's Financial Services and Moody's Investors Services Inc. place Ambac's long-term unsecured debt and financial strength ratings at junk status.
Shares closed 39 cents lower at 79 cents on Tuesday. The stock has traded between 35 cents and $2.09 in the past year.