Moody’s Investors Service said the proposed rehabilitation plan to deal with Ambac Assurance Corp.’s segregated account of high-risk insured assets is a credit positive and, if confirmed by the courts, will put the Wisconsin-domiciled bond insurer “one step closer to an orderly run-off.”
Ambac has not written new policies since June 2008. It was a triple-A rated insurer before its portfolio imploded from guaranteeing toxic mortgage-related assets.
It is now rated ‘Caa2’ by Moody’s and ‘R’, indicating regulatory action, by Standard & Poor’s.
The rehabilitation plan was announced Oct. 8 by Sean Dilweg, the Wisconsin insurance commissioner.
Dilweg created the segregated account in March and deposited into it about 700 of Ambac’s riskiest policies covering a net par outstanding amount of about $50 billion.
Dilweg’s proposed plan, which requires approval from the Wisconsin Circuit Court for Dane County, would give segregated account policyholders 25% of their permitted claims in cash and 75% in notes backed by the company’s surplus with a scheduled maturity of June 7, 2020.
The notes would bear a 5.1% coupon and would make interest payments on a schedule in accordance with the original policy contract.
“That really helps to mitigate the liquidity crunch in the general account,” Helen Remeza, vice president and senior analyst at Moody’s, said in an interview.
She added that the plan will allow the insurer to pay $656 million of suspended claims that came due in the six months ending June 30.
The general account includes about $200 billion of insured municipal bonds.
That action will remove substantial uncertainty, Remeza said.
The Wisconsin regulator earlier clarified Ambac’s fiscal future in June when it ordered the insurer to pay 14 major banks $2.6 billion in cash and $2 billion in surplus notes in exchange for commuting, or tearing up, a number of credit default swap contracts that had a face value of $16.4 billion.
“The filing of the final plan, together with the commutation in June, puts Ambac one step closer to an orderly run-off, which is credit positive for general account policyholders,” Remeza wrote in Moody’s Weekly Credit Outlook.
The separate account is mostly made up of MBS and other structured finance products.
The account also includes defaulted municipal debt issued for the Las Vegas monorail by Las Vegas Monorail Co. through the Nevada Department of Business & Industry, and some other muni assets, including surety and swap wraps, according to Remeza.
Dilweg said last week the rehabilitation plan aims to give holders of the risky assets as much cash as possible without depriving Ambac of its ability to pay other future claims.
The Wisconsin regulator last week released four scenarios assuming different losses and remediation recoveries.
In the best-case scenario, surplus noteholders would be paid all owed claims, leaving money left over to pay subordinate claims including those from reinsurance contracts.
In the three other scenarios, segregated account policyholders take a loss. In the most stressful case, Remeza said senior note policyholders would receive 45% of par, resulting in a 58.75% ultimate recovery on policy claims, while subordinate claims would receive nothing.
Before the separate account was established, Ambac policyholders were treated on a “first-come, first-served” approach, Remeza wrote in April.
That left many policyholders — including muni-debt owners — at a disadvantage because “aggregate resources may ultimately prove to be inadequate to cover all claims.”
Dilweg plans to keep the courts current on Ambac’s run-off by providing an annual update. If Ambac’s unwinding goes smoothly, the cash-to-notes ratio could increase if claims-paying resources are sufficient.
