NEW YORK — Ambac Financial Group Inc. warned Monday it may file for bankruptcy by the end of the year even if it's unable to reach an accord with debtholders on a pre-packaged bankruptcy agreement.
The announcement came as Ambac, a bond insurer that sold protection on mortgage securities, said its board had voted to skip an interest payment on senior notes due in 2023. The payment was due to be made Monday; if the insurer still hasn't paid in 30 days, it would be in default and its debtors could accelerate the maturity of the notes.
The decision to skip the interest payment represents an attempt to force the hand of Ambac's debtholders. The company, whose guarantees on mortgage securities have soured as homeowners have fallen behind on their loans, had already said it had been attempting to negotiate a pre-packaged bankruptcy with a group of its senior debtholders. But the default places additional pressure on creditors who could face a lengthy, costly fight in court if they don't agree to such a pre-packaged arrangement.
Within 30 days, Ambac said, it will pay the skipped interest payment, file for bankruptcy without a prior agreement with its creditors, or reach an agreement and file a pre-packaged bankruptcy.
Complicating the decision for Ambac's debtholders are $7 billion of earlier net operating losses. The losses, perversely, are now an asset: They can be used to reduce taxes the company might pay if it were to return to a profit. The Internal Revenue Service, however, places restrictions on how they can be used. One trigger that would limit their use would be a bankruptcy that replaces debt with equity and hands a substantial amount of new shares to any investors that already owned 5% of the stock.
Ambac shares fell by 52% to 40 cents in morning trading.
Ambac said in a securities filing Monday that "several factors" will influence which path it takes, including "the status of negotiations with the ad hoc committee of senior debt holders and actions required to preserve the" net operating losses.
Ambac had total indebtedness of $1.62 billion as of June 30.
Ambac, and its primary regulator, the Wisconsin insurance commissioner, are also facing a fight with a group of policyholders over a plan to segregate $50 billion of its policies backing structured securities. The commissioner's plan, announced in October, would allow claimholders of those segregated policies to receive 25% of their claims in cash and 75% in the form of 10-year notes with a 5.1% coupon. The idea is to preserve enough cash so the bond insurance unit can continue to pay claims on the rest of its policies.
Ambac's bond insurance unit hasn't underwritten new business since mid-2008.
