Investor Alert

Nov. 1, 2010, 4:18 p.m. EDT

Ambac plunges on bankruptcy warning

Bond insurer misses interest payment, says it can’t raise capital

By John Spence and Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) — Ambac Financial Group Inc. lost almost half its market value Monday after the bond insurer said it missed an interest payment and warned it may file for bankruptcy before the end of the year.

The New York-based company /quotes/comstock/13*!abk/quotes/nls/abk (ABK 0.49, +0.07, +17.72%)  said in a regulatory filing that its board decided not to make an interest payment that was due Monday on 7.50% debentures that mature May 1, 2023.

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If the interest is not paid within 30 days, an event of default will occur, Ambac said.

Ambac had $1.62 billion in debt at the end of June. It’s next interest payment is due on Nov. 15.

The company also said it hasn’t been able to raise new capital as an alternative to seeking bankruptcy protection from creditors.

Ambac has been working with an ad-hoc committee of senior-debt holders to try to restructure its debt through a prepackaged bankruptcy filing. If it can’t agree to such a plan, Ambac said it will file for Chapter 11 bankruptcy protection from creditors before the end of 2010.

Ambac shares slumped 49% to 42 cents in late afternoon action Monday.

Ambac’s demise highlights the decline of bond insurance, a previously booming business that was among the hardest hit during the financial crisis. The industry has only one active player now, Assured Guaranty Ltd. /quotes/comstock/13*!ago/quotes/nls/ago (AGO 19.55, +0.45, +2.36%)  . Read about this industry of one.

Ambac was one of the largest insurers of municipal bonds, but it expanded by selling guarantees on mortgage-backed securities and more complex mortgage-related vehicles known as collateralized debt obligations.

When house prices started slumping in 2007 and mortgage defaults picked up, Ambac was left with huge claims that it couldn’t afford to pay.

The most toxic part of the company’s business was seized by regulators earlier this year. This is being slowly shut down in a controversial process that leaves many policyholder claims only partially paid in cash. See the latest on Ambac’s regulatory rehabilitation.

Tax assets

On Monday, Ambac estimated that it has an asset called a “net operating loss tax carry forward,” or NOL, that’s worth roughly $7 billion.

NOLs are created when companies report big operating losses. This generates credits that can be used to offset any operating profits made in the future.

However, Ambac said it may not be able to use a lot of its NOLs if the owners of the company change.

“An ownership change would occur if shareholders owning 5% or more of the company’s stock increased their percentage ownership (by value) in the company by 50% or more, as measured over a rolling three-year period beginning with the last ownership change,” Ambac explained.

If Ambac files for bankruptcy and debt holders get stock in a reorganized company, that could trigger an ownership change and imperil the value of the NOLs, the company added.

John Spence is a reporter for MarketWatch in Boston. Alistair Barr is a reporter for MarketWatch in San Francisco.

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/quotes/comstock/13*!abk/quotes/nls/abk AMBAC Financial Group Inc (ABK)
/marketstate/country/US The market is open6:53:13 pm The market is closed6:53:13 pm
$ 0.49
Change +0.07 +17.72%
Volume 37.28m Real time quotes
/quotes/comstock/13*!ago/quotes/nls/ago Assured Guaranty Ltd (AGO)
/marketstate/country/US The market is open6:53:13 pm The market is closed6:53:13 pm
$ 19.55
Change +0.45 +2.36%
Volume 1.63m Real time quotes

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