Ambac Slumps As Company May Seek Bankruptcy Protection, Enters "Rehabilitation" Of Segregated Account

Yet more short sellers vindicated. From Business Wire:

Ambac Establishes Segregated Account for Certain Policies

Wisconsin Insurance Department to Oversee Rehabilitation of the
Segregated Account

Ambac in Settlement Negotiations with CDO of ABS Counterparties

NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) announced today
that, at the direction of the Office of the Commissioner of Insurance of
the State of Wisconsin (“OCI”), Ambac Assurance Corporation (“AAC”),
Ambac’s principal operating subsidiary, has established a segregated
account for certain of AAC’s liabilities, primarily policies related to
credit derivatives, residential mortgage-backed securities (“RMBS”) and
other structured finance transactions. This action derives from OCI’s
view that immediate action is necessary to address AAC’s financial
position. In conjunction with the establishment of the segregated
account, OCI has commenced rehabilitation proceedings with respect to
liabilities contained in the segregated account in order to facilitate
an orderly run-off and/or settlement of those specific liabilities. In
addition, Ambac announced that it has reached a non-binding agreement on
the terms of a proposed settlement agreement with several counterparties
to commute substantially all of its remaining collateralized debt
obligations of asset-backed securities (“CDOs of ABS”).

The segregated account established by AAC at OCI’s direction will
contain: (i) certain policies insuring or relating to credit default
swaps; (ii) all of its RMBS obligations (some of which will be allocated
to the segregated account after it is established); (iii) certain other
identified policies insuring troubled credits; (iv) certain student loan
policies; and (v) certain other contingent liabilities including, but
not limited to all of AAC’s liabilities as reinsurer under certain
reinsurance agreements. The segregated account is supported by a $2
billion secured note issued by AAC and an aggregate excess of loss
reinsurance agreement provided by AAC.

Pursuant to the verified petition filed on March 24, 2010 by OCI in
connection with the rehabilitation proceedings with respect to the
segregated account, OCI has stated that within approximately six months
it will seek the rehabilitation court’s approval for a plan of
rehabilitation in connection with the segregated account. The verified
petition states that the plan of rehabilitation will provide, among
other things, that policies in the segregated account shall receive in
respect of claims made, a combination of cash and surplus notes. Prior
to approval of the plan of rehabilitation, claims in respect of
segregated account liabilities will not be paid.

Policy obligations not transferred to the segregated account remain in
the general account of AAC, and such policies are not subject to and,
therefore, not directly impacted by, the segregated account
rehabilitation plan. AAC is not, itself, in rehabilitation proceedings.

Michael Callen, Chairman of the Board of Directors, commented, “The
Board has worked diligently over the past two years to forge the best
possible outcome for Ambac and its various stakeholders. In light of
OCI’s determination to take some sort of rehabilitative action with
respect to Ambac Assurance, the Board has determined, after thoughtful
and careful consideration, that compliance with the direction of OCI to
establish the segregated account of Ambac Assurance and to consent to
the terms of the proposed settlement agreement of our CDO of ABS
portfolio is the best alternative available. The actions taken today,
together with the proposed settlement if effected, commute substantially
all of our CDO of ABS exposure at a substantial discount to the expected
present value of potential claims.”

Mr. Callen commented further, “While certain structured finance asset
classes and other credits have been segregated for rehabilitation,
virtually the entire insured municipal portfolio remains outside the
rehabilitation proceedings. The Ambac Board and management team are
committed to continuing to work hard to manage our resources effectively
in the service of all constituents.”

The proposed settlement agreement with CDO of ABS counterparties
provides that AAC will pay in the aggregate (i) $2.6 billion in cash and
(ii) $2.0 billion of newly issued surplus notes of AAC. The surplus
notes will have a maturity date of ten years from the date of the
closing. Interest on the surplus notes will be payable at the annual
rate of 5.1%. All payments of principal and interest on the surplus
notes will be subject to the prior approval of OCI. If OCI does not
approve the payment of interest on the surplus notes, such interest will
accrue and compound annually until paid. The terms of the proposed
settlement agreement, as negotiated to date, may change prior to the
closing or the transactions as contemplated by the proposed settlement
agreement may not close at all.

Counterparties to credit default swaps insured by AAC representing a
significant portion of the net notional amount outstanding as of
December 31, 2009, have agreed to temporarily forebear from accelerating
the obligations of AAC under such credit default swaps or asserting any
claims against AAC or any affiliate of AAC based upon the segregated
account rehabilitation proceedings.

Comments

[hedgeless_horseman]

Nevertheless, S&P up 8.32. 

We are ALL currency traders, now.

[curbyourrisk]

Where is Charlie Gasparino???

[Cookie]

Watching the American economy/political system is like watching a large turd being flushed away

[Gordon_Gekko]

Why is it slumping? Isn't this good enough reason for the stock to skyrocket in the US stock market circus? ROFL

[ghostfaceinvestah]

Another FG commutes more CDO insurance for a discount, but yet AIG paid 100 cents on the dollar.

[SteveNYC]

Toast-bac.

[mark456]

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