Fight Over Corporate CUs’ Bond Insurer Heats Up

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SAN FRANCISCO – A group of hedge funds, including credit giant King Street Capital, filed suit against Ambac Financial Group to try to stop transfers to the company’s recently created holding company from its main bond-insurance unit that has halted insurance payments on billions of dollars of toxic mortgage-backed securities, much of it held by corporate credit unions.

The funds, which also include Aurelius Capital Management, Fir Tree, Monarch Alternative Capital and Stonehill Capital Management, are trying to make sure Ambac Financial Group, the holding company, doesn't siphon off money and other valuable assets from Ambac Assurance Corp, which holds insurance policies on billions of dollars of bonds held by the corporates. They want all assets to go toward paying policyholders, including them.

The corporates have been struggling for the past year as the financial prospects of Ambac and other monoline insurers such as MBIA, Syncora Guarantee and FGIC, have deteriorated to determine what portion of the troubled bonds will be covered by the insurers. Two of those insurers, Syncora and FGIC, stopped paying all claims last year.

Southwest Corporate FCU reported yesterday it has recorded $6.9 million in impairment charges related to Ambac-insured securities and could face another $41.7 million of charges on Ambac-backed securities. Members United Corporate FCU reported Monday it had some $68.3 million of other-than-temporary impairment on $258.8 million of bonds insured by Ambac. U.S. Central has $753.8 million worth of its bonds insured by Ambac.

Ambac warned recently that it may file for bankruptcy protection from creditors. The company suffered massive losses after insuring mortgage-related securities that turned toxic during the financial crisis.

Wisconsin's Office of the Commissioner of Insurance, the main regulator of Ambac, seized part of the insurer's business earlier this year to protect municipal bond investors. Policyholders who bought protection from Ambac on mortgage-backed securities were moved to a segregated account overseen by the regulator. The regulator’s plan would preserve Ambac’s assets to pay claims on municipal bonds insured by Ambac, with mortgage-backed bond holders a lower priority.

"In the rehabilitation of the segregated account of Ambac Assurance Corp and related matters, the first priority of the Office of the Commissioner of Insurance is to protect all policyholders," the regulator said in a statement Tuesday. "OCI remains focused on its duty under Wisconsin insurance law to implement a durable solution that serves the interests of all policyholders, as well as the general public."

Some Ambac creditors have discussed trying to gain control of the troubled bond insurer and its assets through bankruptcy or debt-for-equity swaps.

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