Ambac Financial Group, parent of the junk-rated bond insurer Ambac Assurance Corp., said in a regulatory filing Monday morning that it may be forced to file for bankruptcy by yearend because it has been unable to raise fresh capital.
The insurance holding company said it will not be able to make the scheduled interest payment on its debt due on Nov. 1.
Ambac Financial’s stock fell 44% in early morning trading to $0.46.
The parent company has warned several times since November 2009 that it could seek a pre-packaged bankruptcy plan in early 2011. By defaulting on its debt, it could seek bankruptcy protection before the end of the year.
“If the interest is not paid within 30 days of today, an event of default will occur under the indenture for the 2023 notes,” the company said in its 8-K filing to the Securities and Exchange Commission. It added that the notes have a 7.5% coupon maturing in May 2023.
“If the company is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy under Chapter 11 of the United States Bankruptcy Code prior to the end of the year,” it added.
Helen Remeza, senior analyst at Moody’s Investors Service, said a pre-packaged bankruptcy will have limited impact on policyholders, including those holding Ambac Assurance-backed municipal bonds, because the insurer is a distinct regulated entity.
She noted that that when insurance holding company Conseco filed for bankruptcy in 2002, its life and health insurance subsidiaries continued to operate. It took almost a year for the holding company to re-emerge, but the insurance operating companies still functioned.
“For insured bonds, this shouldn’t be any news,” Remeza said, noting that she wrote about the possibility of the scenario in June. “Fundamentally, I think, from a credit perspective, Ambac’s policyholders are unlikely to be affected by holding company default.”
Implications for Ambac debt holders are more direct. The company said a default would permit the debt holders to accelerate the maturity of all of the company’s indebtedness.
At the end of the second quarter, Ambac Financial’s total indebtedness was $1.622 billion. The next scheduled payment of interest on the company’s indebtedness is Nov. 15.
Prior to the default, Ambac Financial said it intends either to pay interest on the 2023 notes, or to solicit acceptances for a prepackaged plan of reorganization.
If that solicitation is successful, then it would either file for bankruptcy with a related prepackaged plan, or file for bankruptcy under Chapter 11.
