Ambac Financial Group is considering filing a prepackaged bankruptcy because the company said it’s unable to take dividends from its bond insurance unit to cover holding company expenses.
“It is highly unlikely AAC will be able to make dividend payments to the company in the foreseeable future,” Ambac said in a regulatory filing Tuesday, referring to Ambac Assurance Corp., its principal operating unit.
In a prepackaged bankruptcy, a firm reaches an agreement on a restructuring with many of its creditors before it seeks court protection.
Ambac Assurance, the second-largest bond insurer before the onset of the credit crisis, is issuing so-called surplus notes to policyholders rather than covering their full claims. Ambac on Monday announced that it replaced $16.4 billion of collateralized debt obligations backed by subprime mortgages in exchange for $2.6 billion in cash and $2 billion of newly issued surplus notes in AAC.
“The company’s liquidity and solvency are largely dependent on dividends and other payments from AAC and on the value of AAC after the surplus notes have been redeemed, repurchased or repaid in full,” the company said in the filing.
Wisconsin Insurance Commissioner Sean Dilweg said in March he was taking over Ambac’s policies on residential mortgage-backed securities and halting some payments to protect municipal bondholders who count on the company’s guarantees. Claims set from payment to mortgage investors threatened to deplete Ambac’s reserves and leave a thinner cushion for municipal-bond clients whose coverage extends decades into the future, Mr. Dilweg said.