Closing in on the one-year anniversary of its bankruptcy filing, Ambac Financial Group has filed a new reorganization plan that all parties involved have agreed on.

Ambac Financial said those parties include its bond insurer subsidiary Ambac Assurance Corp., the segregated account established for its most toxic policies, the Wisconsin commissioner of insurance, the rehabilitator of the segregated account, and the committee of unsecured creditors.
At the center of the negotiations was how to allocate tax benefits related to $7 billion in net operating losses and other resources.

It’s not clear whether the plan would have any impact on holders of municipal bonds wrapped by Ambac Assurance, but a spokesman for Ambac Financial said Ambac Assurance’s policies are still protected by its claims-paying resources, including its investment portfolio. The spokesman said Ambac Assurance could benefit by receiving an allocation from the parent company’s net operating losses.

Ambac, which lost its triple-A ratings during the financial crisis, currently is prohibited from originating new bond insurance policies.

The segregated account is overseen by the Wisconsin regulator. The plan of rehabilitation relating to the segregated account is not yet effective and hasn’t been implemented by the regulator. The segregated account was established in March 2010 to separate those liabilities from the company’s muni bond insurance policies.

Ambac filed for protection from creditors in 2010 and the segregated account holds about $50 billion in policies.

Ambac Financial in July filed a plan that the Wisconsin commissioner of insurance quickly criticized. In May, the commissioner proposed a plan that Ambac Financial said was unacceptable.
The new reorganization plan appears to settle a dispute between creditors of Ambac Financial and Ambac Assurance policyholders over how to split the tax losses and other resources.

“We believe that the plan is in the best interest of Ambac Financial Group’s creditors and also of Ambac Assurance Corp.’s policyholders,” said a spokesman for Ambac Financial. “While there are still challenges ahead, we look forward to continuing to work towards a successful plan confirmation and the implementation of our business plans upon emerging from bankruptcy.”

One major challenge to successful implementation of the plan was that the Internal Revenue Service sued Ambac Financial a year ago, challenging the legality of the $7 billion in net operating losses and an additional $700 million in tax refunds.

Ted Nickel, the court-appointed rehabilitator, said: “The rehabilitator recognizes the advantages of reducing uncertainty and avoiding unnecessary litigation, as achieved by this settlement. It further allows the rehabilitator to remain focused on the rehabilitation of the segregated account of Ambac Assurance.”

The plan has been submitted to the court and will go through a disclosure hearing on Oct. 5, when the court will decide whether the information provided is adequate enough for creditors to vote on a decision. If the court deems there is sufficient information, investors will receive a ballot in the mail.

Under the plan, equity holders of Ambac Financial will not receive anything. The senior note holders will receive shares in the reorganized company. The agreement also breaks down how net operating losses will be divided. The holding company currently owns those NOLs and under the agreement, Ambac Assurance can share the tax benefits.

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