More Bondholders Challenge Proposed Ambac Settlement In Court
May 06 2010 - 2:33PM
Dow Jones News
The ranks of investors challenging a Wisconsin regulator's plan
to rescue the troubled bond insurer Ambac Assurance (ABK) are
growing.
Eaton Vance, Nuveen Asset Management, Restoration Capital and
Stone Lion Capital filed a brief Wednesday in Dane County Circuit
Court in Madison, Wis., asserting that the regulator's intention to
pay off bank counterparties ahead of policyholders is unfair.
The bondholders--who say they hold a majority of Las Vegas
Monorail Project Revenue bonds guaranteed by Ambac insurance--are
seeking to stop the regulator, the Wisconsin Office of the
Insurance Commissioner, from proceeding with a plan that would give
unnamed banks $2.6 billion in cash and $2 billion in securities
called surplus notes. In exchange, the banks would tear up $17
billion worth of Ambac-insured collateralized debt obligations.
These CDOs are not part of the segregated account the regulator
created in late March to hold $68 billion worth of contracts on
residential mortgage-backed bonds and other kinds of structured
securities. Claims made by owners of assets in the segregated
account won't be paid until the court approves a rehabilitation
plan, which the regulator expects by September.
The segregated account is capitalized by a $2 billion secured
note due 2050, and remaining claims would largely be satisfied by
surplus notes from the general account.
In the court papers, the owners of the Las Vegas Monorail
bonds--guarantees on which were placed in the segregated
account--questioned the proposed deal the regulator struck with the
banks. They said the upfront cash payment of $2.6 billion depletes
the insurer's assets by almost one-third, considering that Ambac
had assets of about $8.5 billion and a $800 million surplus at the
end of 2009. It would also severely comprise Ambac's ability to pay
the $2 billion secured note to the segregated account
policyholders.
The brief asserts that the settlement is unfair since it gives
preferable treatment to the bank counterparties ahead of Ambac's
policyholders. Also, considering Ambac had reserved $3.8 billion
for obligations to those banks and others who had similar contracts
through credit default swaps, the proposed settlement pays more
than the banks' claims are worth "on the face of it," the brief
said.
"The proposed settlement could have a devastating impact on the
rehabilitation of the segregated account of Ambac and cause
irreparable harm to the rights of the LVM [Las Vegas Monorail]
Bondholders and other policyholders whose policies have been
allocated to the segregated account," the brief said.
The bondholders not only want the court to block the settlement
from happening, which they believe is soon to be finalized, but to
have it come under court review and approval.
More than $500 million in insured Las Vegas Monorail debt
remains outstanding, according to the brief, and Ambac's exposure
is around $1.2 billion.
Sean Dilweg, the Wisconsin insurance regulator, defended his
plan in a written statement. "My intent and my mandate as a
regulator are to protect the interests of all policyholders," he
wrote. "All of my efforts are geared toward providing a durable
solution for policyholders."
The motion from the Las Vegas Monorail bondholders comes after
another group asked the court late Friday to block the settlement
with the banks. The firms--hedge funds Aurelius Capital Management,
Fir Tree Inc., King Street Capital LP, King Street Capital Master
Fund, and Monarch Alternative Capital LP and money manager
Stonehill Capital Management--also asked to invalidate the
segregated account. They own or manage $1 billion of residential
mortgage-backed securities backed by Ambac insurance contracts that
were placed in the segregated account.
In addition, Wells Fargo & Co. (WFC) last month filed a
motion objecting to the placement of Las Vegas Monorail insurance
in the segregated account, saying in part that those are only
municipal guarantees in the account.
Ambac, Eaton Vance Management, and Stone Lion Capital Partners
LP didn't return requests for comment, and Nuveen Asset Management
and Restoration Capital Management declined to comment. Lawyers for
the bondholders didn't return calls for comment.
Ambac had been losing millions of dollars a month from the toxic
structured securities it guaranteed. In the fourth quarter of 2009,
it saw a total net loss and loss expenses of $385.4 million.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263;
romy.varghese@dowjones.com
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