Updated from report at 1:10 PM EST to add closing share price, further information on the company's filings.
NEW YORK (
Ambac Financial Group
has raised the specter of pursuing a prepackaged bankruptcy filing in its latest Form 10-Q filing for the third quarter.
The stock plunged 33.1% to finish at 79 cents. The selling gained momentum at roughly 2:00PM EST. The session's low of 75 cents is a level shares haven't seen since early April, although the stock did touch 76 cents on July 10. Volume was 109.1 million, roughly five times the issue's three-month daily average of 21.7 million.
Tuesday's action more than wiped out the roughly 40% jump that followed the release of the company's third-quarter report on Nov. 4. The
headline profit number
for the September quarter -- $2.19 billion -- was the result of unrealized gains within the credit derivatives portfolio, rather than a performance improvement.
In addition to the presence of language that specifically mentions the potential for a prepackaged bankruptcy filing -- a change from the company's previous Form 10-Q for the second quarter filed on August 10 -- the shares were also likely pressured by the weak results from fellow bond insurer
, whose stock was losing 16.7% to $4.00 after it turned in a quarterly net loss of $727.8 million, or $3.50 a share, as a result of increased unrealized losses on credit derivatives.
In the latest Form 10-Q filing, Ambac says its management believes it has "sufficient liquidity to satisfy its needs" through the second quarter of fiscal 2011, although it also includes the customary caveat that "no guarantee can be given" for a number of scenarios dealing with dividend payments, operating expenses and debt service obligations. In the Form 10-Q for the second quarter, Ambac said it could run "out of liquidity by the first quarter of 2011 or potentially sooner," if certain strategies weren't successful.
The prepackaged bankruptcy filing is brought up as a potential strategy for addressing the company's liquidity needs, along with other options such as new business initiatives and efforts to mitigate its losses on poorly performing financial guarantee transactions. The big difference from the Form 10-Q for the second quarter, which also mentions bankruptcy as a possibility, is the specific reference to the development of a prepackaged plan.
A spokesperson for Ambac wasn't immediately available for comment.
The latest filing makes clear the company would if necessary move forward with filing for bankruptcy even if it was unable to gain approval from its creditors for a prepackaged plan.
"If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning reorganization with major creditor groups," the filing states.
Ambac was less explicit In the same section of the Form 10-Q for the second quarter, saying instead it "may need to consider seeking bankruptcy protection" if its strategies don't work out.
David Havens, a managing director at Hexagon Securities, a New York-based boutique investment bank focused on the fixed income markets, views the reference to the prepackaged plan as "very significant." Hexagon has no position in Ambac, according to Havens.
"As a rational analyst, it's hard to look at Ambac and conclude that bankruptcy, or some form of credit event, can be avoided," Havens tells
. "The credit markets themselves are certainly indicating a high probability of default."
The latest Form 10-Q also provided additional details about the status of the parent holding company's principal operating unit, Ambac Assurance Corp., which "has not written a meaningful volume of financial guarantee business since November 2007," just as prior filings have stated. Ambac Assurance has yet to complete its financial statements for the third quarter, but the company says in the filing the unit's statutory capital and surplus "have been reduced significantly."
Ambac also disclosed the Office of the Commissioner of Insurance for the state of Wisconsin, or the OCI, has increased its oversight of Ambac Assurance and is currently evaluating the unit's ability to pay the claims in its insurance portfolio. Ambac cautioned that the OCI could eventually initiate delinquency proceedings against Ambac Assurance as a result of this review, an event that would constitute a default under the company's debt agreements and could potentially trigger a number of remedies for its creditors.
According to the Form 10-Q, a default could result in "acceleration of principal in the amount of $1,642 million
$1.642 billion; termination of credit default contracts that are insured by Ambac Assurance, which could liquidate mark-to-market claims in respect of underlying exposures in the amount of $23,108 million
$23.108 billion; and loss of control rights by Ambac Assurance in respect of insured transactions," among other reverberations.
Hexagon's Havens says the oversight disclosure is telling as well, as it shows regulatory pressure/risk is rising. A determination by the OCI that Ambac Assurance was delinquent and the subsequent default triggers would likely lead to a bankruptcy filing as there currently isn't enough liquidity to pay off the debt.
Havens, however, says it's possible Ambac could limp along for a while, speculating that Wisconsin's OCI, which has jurisdiction because the Ambac Assurance operating unit is domiciled there, is unlikely to want to step in and make a move that could determine the fate of the whole company.
"The regulator is probably within its rights to step in at this point," Havens says. "But if you're them
the OCI, do you want responsibility for Ambac now?"
As for how Ambac could avoid bankruptcy, Havens says the company is pursuing what avenues it can -- mainly seeking to commute insurance policies for pennies on the dollar, a prospect that may be attractive to counter-parties because it's better than getting nothing; and pursuing legal action against the parties that put together some of the residential mortgage backed securities, or RMBS, that it ended up insuring, alleging fraud -- but it faces a tough road, he feels, and the company may not be able to sustain itself long enough for these strategies to make a meaningful dent.
-- Written by Michael Baron in New York.