Ambac in talks for prepackaged bankruptcy

AP News
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Posted: Nov 01, 2010 5:06 PM
Ambac in talks for prepackaged bankruptcy

Bond insurer Ambac Financial Group Inc. said Monday it will file for bankruptcy by the end of the year, either through a prepackaged plan arranged with senior debt holders or through Chapter 11 proceedings.

The development is the embattled company's latest warning amid two years of struggle to regain its footing after getting pummeled by the collapse of the housing market.

Shares of the once high-flying stock tumbled 41 cents, or 50 percent, to 41 cents, trading on high volume. The stock traded above $95 a share in the spring of 2007, before the housing bust.

Ambac spokesman Peter Poillon said the company missed a scheduled interest payment that was due Monday. The company now has 30 days to pay or it will be in default. A default on one payment will allow debt holders and others to accelerate proceedings that would force Ambac into bankruptcy.

"This brings us one step closer," Poillon said, acknowledging that the company has been warning of the potential for a bankruptcy filing since March.

Ambac's talks on restructuring its debt have been ongoing. "We've been in negotiation with an adhoc group of debt holders for a while, for several months," Poillon said.

If it needs to file for bankruptcy protection, Ambac said it will be done by the end of the year.

In March, Wisconsin regulators took over some of the most troubled assets of Ambac's main operating subsidiary, Ambac Assurance Corp., which is based in that state. Regulators feared the company would run out of money paying claims on policies related to risky structured finance transactions. Those include the credit default swaps and residential mortgage-backed securities held by major Wall Street banks that helped to accelerate the national financial crisis.

Bond insurers traditionally offered insurance mainly to government entities for debt that covered infrastructure construction and other municipal projects, but that changed as investors began betting on complex structured finance products like mortgage-backed securities in the late 1990s. The collapse of that market as foreclosures skyrocketed left Ambac and several competitors teetering as they were left on the hook for more coverage than they could financially handle.

Poillon said the latest developments do not affect Ambac Assurance at all. The Wisconsin insurance commissioner, through a spokesman, would not confirm that assessment and declined to comment on the matter.

In June, Ambac reached deals with certain holders of its own bonds to swap debt for stock in a move to preserve cash and shore up its balance sheet.

Last month the troubled bond insurer reached a deal with bankrupt Lehman Brothers Holdings Inc. regarding claims the two filed against each other. One aspect of the agreement was to have Ambac drop its claim for $6.1 billion against Lehman.

In return, Lehman agreed to drop its claim for tens of millions from Ambac Assurance. While technically a settlement, no money will change hands in the deal.