In a report released Friday, JPMorgan Securities analysts looked at the effect on excess spread from a bankruptcy judge's decision earlier this year allowing Ambac Assurance Corp. to start making payments on wrapped non-agency bonds.

Ambac, analysts noted, is paying 25% of outstanding claims, with the remaining 75% serving as surplus notes that may be paid in the future.

Ambac's initial cash payment on Sept. 20 had hit many deals in the September remits, analysts noted. But, operational difficulties might have stopped payments to investors made on all deals, causing many to see the cash hit in October, they said.

In the report, analysts had compiled a list of 522 Ambac-wrapped bonds. Of those, they said that 374 had experienced writedowns or implied writedowns. These bonds would therefore be eligible for wrap payments. Even though it is hard to differentiate bonds that have received insurance payments in the latest remits without looking at each remittance report, analysts tried to identify them based on how much the principal payment rose in September over the past few months.

Some bonds received a 10-fold increase or more or had not had any payments for months before the September payment. Analysts look at both cases as likely to have been paid an insurance draw. Roughly 64 bonds have likely received insurance payments in September remits, analysts estimated. They have yet to get data on 23 deals while for 287 deals they were not able to see an increase in principal payments. They said that it appears likely that most of the initial payments will be made in the October remits.

Aside from the holders of wrapped paper, they said that Ambac payments may serve as a concern to other senior bondholders in Ambac-insured transactions. This is because excess spread was usually allocated to repay insurance claims in the offering documents. 

If the bond insurer can collect excess spread, this will eat into credit support for senior bondholders in the future, which would result in higher writedowns on senior bonds and pricing will reflect this, they said. 

Investors in offerings with any wrapped bonds will have to consider these risks, JPMorgan analysts warned.

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