Ambac Financial Group, Inc., the parent of Ambac Assurance Corporation (AAC), announced yesterday that it had terminated all of its remaining exposure to collateralized debt obligations (CDOs) of asset-backed securities (ABS) totaling $16.4 billion. The termination or commutation involved entry by AAC into a settlement agreement with counterparties to outstanding credit default swaps with Ambac Credit Products that were guaranteed by AAC. Under the settlement agreement, in exchange for the termination of the CDO of ABS obligations, AAC paid to the counterparties a total of (1) $2.6 billion in cash, and (2) $2.0 billion in newly issued surplus notes of AAC. The surplus notes bear an interest rate of 5.1% and have a maturity date of June 7, 2020. Payments of interest and principal on the surplus notes are subject to the prior approval of the Wisconsin Commissioner of Insurance. The counterparties to the settlement and commutation agreements were Banco Bilbao of Argentina, Banco Santander, Barclays Plc, BNP Paribas, CIBC, Commerzbank, Credit Agricole, Deutsche Bank, Natixis, Rabobank Nederland, RBS, Société Generale, and UBS, as well as Citigroup.
The proposed commutation arrangements had been challenged in litigation initiated by a group of hedge funds and investment managers alleging that the holders of the CDOs were receiving preferential treatment. The Wisconsin court overseeing the rehabilitation of AAC by the state insurance commissioner rejected the challenge earlier this month.
On March 24, AAC created a segregated account and consented to rehabilitation of that account by the Wisconsin Commissioner of Insurance. Under Wisconsin law, the segregated account is accorded special treatment akin to collateral supporting a secured obligation, treated almost as a separate insurer from AAC, and was established to hold many of the financial guaranty insurance policies against which there were, or were likely to be, significant claims made against AAC, particularly policies insuring residential mortgage-backed securities and other structured finance transactions. The policies in the segregated account represent more than $35 billion in obligations. In conjunction with the creation of the segregated account, a Wisconsin state court approved the Insurance Commissioner’s imposition of a temporary injunction to halt payments under policies and other contracts allocated to the segregated account, as well as actions or claims against subsidiaries of AAC whose equity interests were made part of the segregated account. The injunction was instituted to permit the Commissioner to prepare a plan of rehabilitation to protect the interests of policyholders, creditors and the public by maximizing AAC’s resources available to pay claims, to provide a fair and orderly payment procedure, and to reform and revitalize AAC. A rehabilitation for a troubled insurer represents a regulatory action taken to avoid liquidation. The segregated account and order of rehabilitation were approved after AAC stated it was unable to file fourth quarter or full-year 2009 results. For the third quarter of 2009, AAC had posted losses of $573 million.
For further details on the commutation arrangements, see the Form 8-K filed by Ambac at www.sec.gov.