Ambac Restructuring Could Mean Bad News for Corporate-Held MBS
The Wisconsin-based monoline insurer subsidiary of Ambac Financial Group has restructured its residential mortgage-backed securities guarantees into a separate, "segregated account" after the state's insurance commissioner successfully petitioned to take control of the fund.
In addition, Commissioner Sean Dilweg has received approval to temporarily suspend payments on claims by Ambac Assurance Corp. pending approval of a rehabilitation plan.
"I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities who rely on AAC's guaranty," Dilweg said. "I have a concrete plan for rehabilitation, and details will be reviewed in court over the coming weeks."
The segregated account will include all residential mortgage-backed securities obligations and select policies insuring credit default swaps, student loans and reinsurance agreements. Ambac Chairman Michael Callen said in a statement that while certain structured financial asset classes and other credits have been segregated for rehabilitation, "virtually the entire insured municipal bond portfolio remains outside the rehabilitation proceedings."
Members United Corporate Federal Credit Union President/CEO Joseph Herbst said the restructuring is expected to have a significant impact of Ambac's ability to pay on the $8 billion corporate's holdings.
"As a result, this could require us to recognize additional other than temporary impairments and could lead to further depletion of member capital," Herbst told members in a March 25 letter, posted on the corporate's Web site (www.membersunited.org). He added the development could also further delay 2009 annual reports, previously expected in April.
Ambac is Members United's second largest monoline insurer, backing about 38% of its insured securities. The $8.5 billion Southwest Corporate Federal Credit Union reported as of Jan. 31 that
Ambac policies represent approximately 42% of its insured securities.
Ambac backs 25% of U.S. Central's insured securities. The Kansas City-based corporate reported Ambac's inability to pay on 100% of claims was partly responsible for its fourth-quarter OTTI.
Combined, the three corporates report an amortized value of approximately $1.5 billion in Ambac-backed securities. Western Corporate Federal Credit Union reported in a December 2007 portfolio update that Ambac represented approximately one-half of its insured portfolio at that time, worth $329 million.
In the same report, WesCorp said most of its insured securities were "older vintages that have paid down to a fraction of their original balances", and added it "has not made many insured purchases during the past three to four years."
In an official release, Ambac said it believes it has sufficient liquidity to remain in business another 12 months. However, due to the restructuring move, it is "highly unlikely" Ambac will make dividend payments in the foreseeable future. As a result, parent company AFG announced it may seek bankruptcy protection.