Ambac Financial Group won a court ruling allowing it to overhaul its insurance unit, a decision that its bankrupt parent greeted as a ‘gigantic step” forward.
The plan, which a Wisconsin state judge approved, allows the Ambac Assurance Corp. unit to limit payments on $64 billion of its riskiest policies. The plan was opposed by hedge funds that invested in billions of dollars of mortgage-backed bonds insured by Ambac, saying it short-changes them.
Ambac Financial Group was once the second-largest U.S. bond insurer, but ran into trouble when it strayed from insuring municipal bonds and began guaranteeing bonds backed by home loans.
Pink sheet shares of Ambac Financial rose more than 50 percent Tuesday to about 19 cents each in the heaviest volume since the days following its Nov. 8 bankruptcy filing. The ruling was dated Friday and made public Tuesday.
Wisconsin’s insurance commissioner proposed the plan as a way to ensure the more stable and much larger municipal bond insurance business would continue to pay claims in full. That business helps local governments lower their borrowing costs.
‘It’s a gigantic step forward because the rehabilitation of the insurance company is what creates value for the debtor in Chapter 11,” said Martin Bienenstock, of the law firm Dewey & LeBoeuf, which is representing Ambac Financial Group in bankruptcy.
The insurance commissioner had warned that if the plan were not approved, the municipal bond policies might have to be included in the rehabilitation as well, or the business might even face liquidation.
‘The plan represents a reasonable response to the financial condition of the segregated account and Ambac generally by addressing the serious of financial hazards to policyholders, creditors and the public,” wrote William Johnston, the Lafayette County judge overseeing the plan in the ruling.
Under the plan, claim payments on Ambac Assurance’s riskier, mortgage-related policies will be limited to 25 percent cash and the rest in a note due in 2020.
A group of hedge funds who said they hold billions of dollars of policies insuring mortgage-related bonds argued that the insurance commissioner’s plan short-changed them to support Ambac Financial Group’s reorganization.
Johnston found that the hedge funds, including Aurelius Capital Management, Fir Tree Inc. and Stonehill Capital Management LLC, did not have standing and were not policyholders in the proceeding.
A spokesman for the hedge funds did not immediately return a call for comment.
The case is In the Matter of the Rehabilitation of Segregated Account of Ambac Assurance Corp, Dane County, Wisconsin, No. 10CV1576.
(Editing by Robert MacMillan)
Topics Wisconsin
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