AMBAC FINANCIAL GROUP INC AMBC
November 19, 2013 - 3:50pm EST by
mip14
2013 2014
Price: 23.00 EPS $0.00 $0.00
Shares Out. (in M): 45 P/E 0.0x 0.0x
Market Cap (in $M): 1,035 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Litigation
  • Insurance
  • NOLs
 

Description

***I was unable to paste the graphs/tables - please use the following link to access the writeup***

https://www.dropbox.com/s/mho58qsecajjf9f/AMBC_Long_Pitch_VIC.pdf


Recommendation: Long Ambac Financial Group Common Stock (AMBC)

Note: Ambac Financial Group has 45.0mm common shares outstanding at a current price of $20.80, giving the company a total market capitalization of $936.0 mm. Additionally, there are 5.05 mm warrants outstanding at a strike of $16.67, expiring on April 30, 2023. At the current price of the common stock, the diluted share count is 46mm (net of share repurchases with cash from warrant conversion) and the diluted market capitalization is $956.8mm. The common stock and warrants are listed on NASDAQ and began trading under the symbols “AMBC” and “AMBCW,” respectively, on May 1, 2013. Throughout the writeup, AFG refers to Ambac Financial Group (Holdco) and AAC refers to Ambac Assurance Corporation (Opco).

*We apologize in advance for the length of this writeup, but felt it necessary given the number of moving parts in the situation.

 

Thesis

We believe that Ambac is a highly attractive post-reorg equity with ~100% upside to fair value in the base case and an upside case in which the investment will be a home run. This upside is accompanied by a palatable downside case in line with current trading prices. In our view, Ambac has substantially over-reserved for losses on insured RMBS and will likely recover more from litigation claims than it has booked, implying that reported adjusted book value significantly understates fair value. The complexity surrounding these contingent claims and the stigma associated with a post-reorg, RMBS/municipal bond insurer has deterred investor interest. As the improved performance of the underlying RMBS collateral is recognized, and Ambac announces the proceeds from its litigation, the market will be forced to revalue the equity. With management’s compensation package on the verge of being finalized, we anticipate that improved transparency and positive commentary will help close the gap between market and intrinsic value.

 

Introduction

Investors don’t like uncertainty. If you read any of the sell-side research on Ambac or talk with market participants, you will hear the constant refrain that the Ambac situation is “filled with uncertainty” and “investors should wait until there is further clarity.” This is exactly why there is an opportunity to own an asset with asymmetric risk/reward and numerous defined catalysts for value realization.

The complexity of the Ambac situation is clearly discouraging investors from the name and has, in our view, led to a substantial misvaluation of the post-reorg equity. Investors cannot seem to grasp: 1. Structure of the rehabilitation plan, claims settlement, and Segregated Account; 2. Losses on insured RMBS; 3. Value of the litigation claims; 4. Value of the NOLs; 5. Exposure to Detroit and Puerto Rico; 6. The complicated financial statements (filled with a litany of confusing accounting). The natural response to this is to put minimal emphasis on the financials and embed a discount in the market value to compensate for uncertainty.

The lack of clarity coming from Ambac’s management team is further depressing investor sentiment. Two recent examples: 1. Ambac did not hold a second quarter earnings call; 2. The company waited until October 10th to post a deck detailing its Puerto Rico exposure, even though Puerto Rico bonds began selling-off in mid-June. The expectation is that management will finalize their compensation package by the end of 2013. With this package set, we believe that management will move to improve transparency and tout the company’s upside potential. We anticipate management will reverse RMBS reserves, give further clarity on litigation claims, and potentially comment on Ambac’s intention to restart its bond insurance business.

We believe that Ambac’s ultimate value will be based on adjusted book value, and we use this methodology as the basis for our analysis. To calculate adjusted book value, we start with Ambac’s reported adjusted book value, post Fresh Start accounting, and make further adjustments based on our estimates of certain contingent assets and liabilities. Essentially, Ambac is a big box of cash and financial assets, with the goal of keeping as many of those assets inside the box by the end of the run-off of the insurance book (the fewer the claims paid, the more assets left in the box). There is no rational reason why the market should not value this pool of assets at 1.0x fair value, with potential upside to adjusted book value coming in the form of a restarted insurance business.

 

Situation Overview

Prior to the financial crisis, Ambac wrote insurance for a wide variety of credits, including RMBS, municipal bonds, and student loan ABS.  Starting in 2007, many of the RMBS credits Ambac insured began to default, causing Ambac to incur significant losses.  Although Ambac managed to raise $1.5 billion of capital in March of 2008, in March of 2010, the Office of Insurance of the State of Wisconsin forced AAC (Opco) to establish a Segregated Account for approximately $35 billion of structured finance products with high probability of default.  The Segregated Account of AAC subsequently entered rehabilitation, with the goal being an orderly run-off of policies and claims. Pursuant to the Segregated Account Rehabilitation Plan, permitted policy claims are settled with a cash payment of 25% of the claim amount and the issuance of Surplus Notes for the remaining 75%. These Surplus Notes accrue interest at a rate of 5.1%, providing Ambac with a highly attractive long-term financing structure. In 2010, AAC also commuted most of its asset-backed CDO exposure for $2.6 billion in cash and $2 billion in newly issued Surplus Notes.  Despite these actions, AFG (Holdco) announced in June of 2010 that it would need to restructure through bankruptcy to reduce its debt burden and settle an outstanding IRS claim.

After a protracted bankruptcy process, AFG emerged this past May with 45 mm common shares, 5.05 mm warrants at a $16.67 strike price, and significant NOLs.  As currently constructed, AFG is a holding company whose principal asset is AAC, itself comprised of the AAC General Account and the AAC Segregated Account (in rehabilitation).

 

Analysis of Key Value Drivers

 

Positive Adjustments to Book Value

Loss Reserves on RMBS

The crux of Ambac’s misvaluation lies in its gross loss reserves, particularly with regard to RMBS.  Specifically, Ambac has taken gross loss reserves of $5.843 billion against the RMBS credits it has insured. As Ambac described, the “adverse development in loss reserves established in prior years” was “primarily due to the continued deterioration of the collateral supporting structured finance policies, including RMBS.” It is key to note that Ambac did not Fresh Start its loss reserves upon emergence. To analyze what represents fair value for loss reserves, we need to develop a strong view on what has happened with the insured bonds and the underlying mortgage collateral.  Since Ambac reports a book with all of its exposures, we can look at the implied market prices for the RMBS credits that Ambac has insured.

Note: To see data yourself, access http://www.ambac.com/authenticate.asp?file=Single_Risk_Exposures_by_CUSIP.xlsx

On a cumulative basis, Ambac has $17.673 billion in outstanding RMBS credits that it has insured.  With loss reserves of $5.843 billion, Ambac is implying a haircut of 33.06% on these insured credits.  Ambac breaks out its par outstanding and reserves by both vintage and underlying collateral type, as seen in the tables below.

As the tables illustrate, Ambac has substantial exposure to vintages in the boom years of 2005-2007, which led them to take very significant reserves against their exposures when the RMBS market collapsed.  If we think about the process of taking reserves, Ambac notes that its reserves represent “a probability-weighted average of all possible outcomes.”  However, history shows that Ambac’s reserves have lagged the market’s understanding of expected future losses. 

Let’s take a moment to discuss our methodology for understanding the market’s expectation of future losses.  Mortgage-backed securities depend on the cash flows stemming from the underlying collateral, which is a pool of mortgages (in this case, residential mortgages).  When the market expects worse employment statistics and lower housing prices than were assumed in pricing the trusts, RMBS prices trade down as the underlying mortgage cash flows have become riskier and potentially insufficient to service the bonds, increasing the chance of bond impairment.  Here, you might ask, isn’t the purpose of bond insurance? In short, yes. Assuming that the insurance counterparty is solvent enough to make good on insurance claims, the RMBS should not trade down, as the insurance company is supposed to step in to make the payments.  However, in the case of Ambac, history suggests that the market does not necessarily trade in this fashion.

Since the RMBS collateral is correlated along the lines of housing prices, in the event of substantial impairment, Ambac would likely not be solvent enough to make good on the claims. Given this logic and having spoken with market participants, we believe that Ambac-wrapped RMBS trade primarily on collateral recoveries and ascribe minimal value to the insurance. To further gauge this assumption, we constructed a representative index of non-insured RMBS with vintages, collateral-types, and underwriters similar to Ambac’s book. The graph below shows the relatively tight correlation between the market trading prices of Ambac’s book and our non-insured RMBS index, indicating that collateral performance is the primary driver of Ambac-wrapped RMBS. As a result, we believe we can look at market prices of Ambac-wrapped RMBS to gauge Ambac’s future insurance losses.

Using Bloomberg and speaking with traders on the Street, we were able to price 83% of Ambac’s outstanding RMBS exposure, including a diversified sampling with vintages across all relevant time periods and collateral types.  The trends since 2007 show that Ambac’s reserves have lagged, then mirrored, and finally exceeded the market implied haircut (Market Haircut = 1 – Bond Price) on Ambac-wrapped RMBS securities. Specifically, if we look at 2007 based on our sample book, Ambac had reserved 6.18% of par while the market implied losses of 6.34% (i.e. bonds traded at 93.66).  By 2008, Ambac’s reserves were only up to 10.96%, while the market’s implied losses had exploded to 52.10%.  As the following table illustrates, Ambac’s reserves significantly lagged the market’s implied haircut through 2011.

After 3 years of recovery in the RMBS market, by Q2 2012, the market implied haircut had essentially come in line with Ambac’s book reserves.  After Q2 2012, a dramatic disconnect between market pricing and Ambac’s reserves emerged. We believe this discrepancy stems from management’s incentive to be excessively conservative with reserves. The decision to over-reserve has the dual effect of creating a low hurdle for future “outperformance” and depressing the stock price prior to the granting of management’s stock-based compensation plan.

To estimate future reserve reversal, we look to the current gap between market implied and book haircuts. As the table and graph above illustrate, the current market implied haircut is 16.11%. This represents a massive gap 16.95% gap on $17.673 billion par value between Ambac’s current reserves and market implied reserves.  To illustrate the substantial impact on valuation from this disconnect, we calculated the implied gain on reversing loss reserves if Ambac’s actual haircut is 15%, 20%, 25%, and 30%, as seen in the table below.

Using the market’s implied haircut, the gain on loss reserves would be more than $3.1 billion, representing ~3.0x Ambac’s current market cap.  Even if we are to assume the market is undervaluing Ambac’s potential haircut by 10% (perhaps because of insurance value), the implied gain on loss reserves would still be more than $1.4 billion. Ambac will be forced to reverse these loss reserves over time, proving an upward catalyst in terms of book value and stock price.

 

Litigation Claims

Although Ambac has taken substantial gross loss reserves on its RMBS portfolio, Ambac appears well-positioned to recover some of that value via litigation recoveries. When Ambac insured RMBS, the originating institutions signed agreements with Ambac verifying that “underlying loans were not materially fraudulent or were the product of material underwriting defects, in breach of express representations and warranties” (Assured Guaranty vs. Flagstar Bank, Civ. 02375). Several recent court decisions have found that a wide array of originators breached their signed representations and warranties, leading to recoveries for counterparties like Ambac that were harmed by the false representations.

With regard to breaches of representations and warranties, Ambac records its expected recoveries as “Subrogation Recoveries” (contra-liability to Loss Reserves), currently marked at $2,395 mm. These recoveries stem from Ambac’s outstanding cases against mortgage originators. As the table below shows, monoline insurers have been exceptionally accurate in forecasting subrogation recoveries, coming out slightly conservative in the three most prominent instances.

*Note that MBIA outlined its expected subrogation recovery from Flagstar and Bank of America (BAC) as a combined value, and the actual subrogation recovery reflects the combined settlement amount.

Based on past history of successful forecasting and conversations with those following the litigation, we believe Ambac’s representation and warranty recoveries will be largely in line with the $2,395 mm figure it has booked.

Even though these recoveries are booked in the financials, the market has still reacted extremely favorably to successful past litigation. For example, after Countrywide (BAC) announced a settlement with MBIA for $1.6 billion, the market cap increased by 46% or about $850 mm the next day, even though recoveries were only about $200 mm above what had been booked. Given the uncertainty with which the market has viewed prior litigation claims, we believe that future settlements/judgments in Ambac’s currently filed litigation will provide a strong catalyst.

The most notable current litigation case is against BAC, who we believe is strongly incentivized to settle. The Gibbs & Bruns settlement (BAC against BNY Mellon) was settled for 8.5 cents on the dollar for RMBS claims. This low amount can be attributed to BAC not being deemed directly responsible for the RMBS losses; instead, the financial crisis was blamed. If BAC were not to settle with Ambac and proceed to trial and possibly lose, the Gibbs & Bruns settlement could potentially be reversed and BAC would risk losing a significantly higher amount than if they just settled with Ambac. Justice Eileen Bransten is presiding over the Ambac-BAC case; this is important as she also presided over the MBIA-BAC case. The MBIA settlement came down to the fact that the First Department New York court ruled that causation for liability is no longer required in order to claim incurred losses. This ruling is crucial because the crux of BAC’s argument was that the losses incurred were due to the financial crisis. Therefore, we expect BAC to settle and not risk going to trial.

Ambac will likely obtain additional litigation recoveries on fraud claims it has filed against mortgage originators.  The key element to understand is that fraud claims cannot be booked in the financials.  Thus, Ambac’s fraud claims, such as a $300 mm claim against JP Morgan, represent additional upside to the marked R&W subrogation recoveries.  These fraud claims have been successful recently, as evidenced by Countrywide being found fraudulent for its sale of RMBS to Fannie and Freddie.

Our conversations with participants following the cases suggest $500 mm to $1,000 mm of additional litigation recoveries.  These recoveries will likely stem from the aforementioned JP Morgan fraud claim, additional fraud claims such as those against First Franklin/Merrill Lynch, and further R&W filings for parts of the insurance book that have not yet had subrogation taken.  We underwrite to a base case of $750 mm in additional litigation recoveries, with a low case of $500 mm and a high case of $1,000 mm.

 

Repurchased AAC-Wrapped RMBS

In managing its risk exposure, Ambac has repurchased, at a substantial discount to par, bonds that AAC insured.  Specifically, Ambac has par value of $1.42 bn in repurchased AAC-wrapped RMBS bonds (see row 497 of http://www.ambac.com/authenticate.asp?file=Invest_Sched.xlsx). Ambac repurchased these bonds for $921.5 mm (65 cents on dollar) and discloses the fair value as $1.08 bn (76 cents on dollar).

Based on our conversations with various professionals and our understanding of the relevant accounting, Ambac has taken reserves against these bonds that remain on its books. Since Ambac now owns these AAC-wrapped bonds, any reserves should be completely reversed, allowing Ambac to recognize a gain. Since we have already adjusted the RMBS loss reserves to fair value, we only add back the difference between Ambac’s 76 cent mark on the bonds and par value. In all three cases, we add back 24% on $1.42 bn of par which yields a $341 mm increase to book value.

 

NOL Valuation

Ambac has $5,151.4 mm of NOLs (~$4,000 mm held within AAC and ~$1,200 mm within AFG) which are fully reserved against on its balance sheet. Given that Ambac is not currently writing new insurance, the NOLs initially appear to have limited value. However, there clearly is a possibility that Ambac receives approval to restart its insurance business; in this case, the NOLs will have substantial value. Furthermore, management has indicated that they would potentially raise capital and purchase a business similar to AAC to utilize the NOLs. In trying to put a value on the NOLs, we analyze them under two primary scenarios: 1. Restart of the insurance business in 2015; 2. Raise capital and purchase assets (high and low case).  We also weight the possibility that Ambac is unable to unlock any value from its NOLs.

In our valuation scenario where Ambac restarts its insurance business in 2015, we looked to the historical cash taxes and effective tax rate of the company prior to the financial crisis. Using the average 2001-2007 cash taxes of $171.2mm divided by the effective tax rate of 26.5%, we get $646.2mm as the NOL utilization amount going forward. In the case where Ambac raises capital to purchase AAC-like assets, we constructed a high and low case with varying assumptions on size of equity raise, leverage, and unlevered ROI. After evaluating these scenarios, we came to a probability weighted NOL value of $256.5mm. The valuation output is summarized in the table below.

In thinking about the value of NOLs within the context of the larger story, we feel that many analysts have overstated the potential impact of NOLs on valuation.  In particular, the idea of purchasing a new business to utilize the NOLs doesn’t derive as much value as many analysts seem to believe.  Instead, the situation where the NOLs really benefit valuation is if Ambac receives permission to restart its insurance business, a situation in which value would likely be so high that the impact of NOLs would be minimal on a home run investment. While the $5,151.4mm headline NOL number appears to represent a lot of value, the NOLs are not a key driver of the Ambac misvaluation story.


Insurance Intangible Asset and Goodwill

In making adjustments to GAAP book value, Ambac backs out $2.136 billion of value for insurance intangible asset and goodwill ($1.621 bn for insurance intangible, $514.5 mm for goodwill). Understanding this valuation adjustment is an exercise in understanding Ambac’s Fresh Start accounting.

In applying Fresh Start, Ambac “adjusted the historical carrying value of its assets, liabilities, and non-controlling interests to fair value,” with reorganization value in excess of fair value of “identified tangible and intangible assets” being attributed to goodwill (see table below).  

Given that Ambac sees goodwill as deriving value from neither tangible nor intangible assets, we agree with Ambac’s decision to back goodwill out of book value.

However, we believe that Ambac should not have backed out the insurance intangible asset from book value.  The insurance intangible asset “represents the fair value adjustment for financial guarantee insurance and reinsurance contracts.” Due to certain accounting rules, “insurance and reinsurance assets and liabilities continue to be measured in accordance with existing accounting policies and an intangible asset is recorded representing the difference between the fair value and carrying value of these insurance and reinsurance assets and liabilities.”

The insurance intangible asset relates to a number of B/S accounts: premium receivables, reinsurance recoverable on paid and unpaid losses, deferred ceded premium, subrogation recoverable, losses and loss expense reserve, unearned premiums, and ceded premiums payable. Since we are making fair value adjustments to the loss reserve, we do not want to double count and therefore only add back a portion of the insurance intangible. We compute this amount as the total amount of the intangible ($1,621.6 mm) less our RMBS loss reserve reversal in the low case ($1,418 mm), yielding a $203.6 mm increase in book value. In the low case, we have essentially assumed that Ambac’s fair value adjustment of $1,621.6 mm is not overly conservative and simply split this amount into two separate add-backs. In the base and high case, we use higher estimates for RMBS loss reserve reversal and therefore adjust book value upwards by more than the insurance intangible.

 

Negative Adjustments to Book Value

Student Loan Reserves

While the gross loss reserves for RMBS credits appear materially overstated (to the aforementioned tune of $1.4-3.0+ billion), we believe that student loss reserves may be understated.  During the boom lending years, for-profit education loans proliferated, and the current market perception of many of these loans is quite negative.  Specifically, using the same methodology as we used for RMBS credits, we were able to price 52% of the AAC-wrapped student loan ABS bonds.  On these bonds, the implied market haircut is 26.58% (vs. Ambac’s book haircut of 18.52%).  However, a substantial portion of the book that we have not priced ($1.35 billion) comes from bonds secured by student loans originated by National Collegiate Trust (First Marblehead).  The average National Collegiate bonds we priced have an implied haircut of 42.7%.  If we were to assume the unpriced National Collegiate bonds look the same, our implied market haircut for the book reaches 31.5%, suggesting Ambac may be under-reserved in a downside scenario.

In thinking about specifics, it is important to take note of a key dynamic in expected student loan losses: the difference between for-profit and not-for-profit issuers.  As Ambac describes:

“Collateral for the For-Profit Issuers consists of private loans which do not have any federal guarantee as to defaulted principal and interest. Collateral for the Not-For-Profit Issuers consists of both FFELP and private student loans. Private loan defaults have been on the rise since the credit crisis in 2008 began. Elevated unemployment rates, combined with high student loan debt levels will continue to put pressure on borrower’s ability to pay their loans.”

As a result of the differences in collateral and government backing, Ambac has taken large reserves on its for-profit issuers and substantially smaller reserves for its not-for-profit issuers.

Based on our analysis, we view Ambac’s book haircut of 18.5% as perhaps 8% under-reserved in the base case, implying an additional $463 mm in student loan losses. In underwriting the low and high case, we include additional losses of $600 mm and $200 mm, respectively. Ambac notes that in what they describe as “the highest stress scenario,” these losses might reach $753 mm, indicating that our adjustments are quite conservative.


Puerto Rico Exposure

After Detroit filed for bankruptcy, investors looking for the next municipal crisis turned to Puerto Rico.  As the graph below illustrates, Ambac’s share price has closely followed the weakness of the S&P Municipal Bond Puerto Rico Index (SAPIPR), plummeting 45% from a high of $27.25 to a low of $15.03 in 5 months.

The market’s reaction to the Puerto Rico situation shows that investor understanding of Ambac’s obligations is limited. The Excel file we mentioned in the RMBS section also contained all of Ambac’s Puerto Rico exposure (the Excel was published on June 30th). Yet, when the Barron’s Puerto Rico article broke, the market acted as if it had absolutely no understanding of Ambac’s Puerto Rico exposure.  It took Ambac’s publication of its exposure in a slide deck to calm investors; the stock rallied 15% in the two days after Ambac published its deck, even though the information had already been public.

The table below shows that out of Ambac’s $2.5 billion of Puerto Rico exposure, only 10% is Commonwealth General Obligation (GO).  The remaining 90% is backed by pledged revenue streams from sources like toll receipts, and sales, gas, rum, and hotel occupancy taxes.  Ambac’s total Puerto Rico exposure is summarized in the table below.

Aside from the sufficient debt service coverage ratios highlighted in the table above, revenue-backed bonds are safer for the following reasons:

Sales Tax Revenue Bonds (COFINA): $808mm exposure

  • Backed by 2.75% of the first dollars collected of Puerto Rico’s 7% sales tax
  • Sales tax fed by a large base of products and services, excluding the volatile energy and automobile sectors
  • Monies segregated from the General Fund
  • Exempt from the Constitution’s claw-back provision

Highway and Transportation Authority: $760mm exposure

  • Backed by certain toll receipts, taxes on gasoline and other fuel, vehicle license fees, and investment income
  • Required to maintain a debt service reserve equal to the lesser of the maximum debt service on Highway Revenue bonds or 10% of the principal amount of bonds outstanding
  • Toll revenues (27% of revenues) exempt from the Constitution’s claw-back provision

Infrastructure Financing Authority – Rum Tax: $574mm exposure

  • Backed by Federal excise taxes on rum
  • First  $117 million of rum taxes segregated into a designated fund
  • May pursue a budgetary appropriation of funds if less than $117 million is received

Convention Center District Authority Hotel Tax: $137mm exposure

  • Backed by hotel occupancy taxes (e.g. casinos, resorts, hotels, motels, inns, etc.)
  • Tax collections segregated into a separate account every month, which transfers funds to the trustee within 3 business days

The GO bonds are admittedly riskier considering Puerto Rico’s shrinking economy.  The commonwealth has been suffering from a recession for 7 straight years and has a 15% unemployment rate.  It currently carries $70 billion of outstanding debt and a heavy $17,000 per capita debt burden.  In addition, Puerto Rico depends on access to capital markets in order to balance its budgets.  With the current high-yield environment, Puerto Rico is avoiding any new issuances since it has sufficient funding to support operations until at least June 30, 2014, but a sustained loss of market access could pose a risk in the future. 

All is not bad, though.  Recent reforms put in place by newly elected Gov. Alejandro Padilla offer signs of improvement.  For example, the pension reform plan reduces contractual obligations that the Employee Retirement System has to make to public employees while increasing the member contributions and retirement age, which will help reduce the $1.3 billion deficit.  Furthermore, he has expanded the tax base to include services like consulting and B2B activity while enforcing stricter measures against tax evasion.

Investors should be cognizant of the difference between the situations in Puerto Rico and Detroit.  Whereas Detroit had no satisfactory plan to address their fiscal issues and relied on an Emergency Manager, Puerto Rican leaders are expressing that they have every intention of honoring the commonwealth’s debt and avoiding a restructuring or default.  In an October 15, 2013 webcast, Governor Padilla remarked, “We will do everything, and I repeat, everything that is necessary for Puerto Rico to honor all its commitments.  These are not just constitutional obligations but also moral obligations.”

This segues into a discussion about the legal protections that the Puerto Rican Constitution has in order to protect bond holders in the off chance of a non-payment.  Article VI Section 8 states:

“In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law.”

In other words, the public debt of Puerto Rico has a priority claim on resources and must be paid prior to other obligations if there are insufficient funds for debt service.

Base Case
To estimate the losses from Puerto Rican debt exposure, we still worry that despite Governor Padilla’s aggressive efforts to meet obligations, the GO bonds will not be paid in full.  In our base case, we make the assumption that the GO obligations are completely wiped out. Given that all of the revenue bonds have DSCR in excess of 1.4x, we assume that these bonds recover in full.  While the ultimate distribution of haircuts may vary, we see $250 mm in losses as reasonably conservative given the fear-mongering about the municipal bond market post-Detroit. 

High Case
A more bullish case does not call for a complete loss on the GO bonds.  Improvement in the economy and Puerto Rico’s focus on repaying its “moral obligations” lead to a scenario where the GOs only take a modest haircut.  Given that current yields are in the 7% range (10-11% including tax-free benefits) on these long-dated obligations, we see scenarios where GO holders take a 20% haircut as reasonable.  In the high case, losses are assumed to be $50 mm. 

Low Case
A bearish case calls for not only a total loss on GO bonds but also on some of the less secure revenue-backed bonds. We view bonds issued by Infrastructure Financing Authority (rum tax) and Convention Center District Authority (hotel tax) as higher risk.  The bonds backed by COFINA and the Highway and Transportation Authority are safer, as they have more consistent streams of revenue and are protected from the Constitution’s claw-back provision.  With approximately $500 mm in revenue bonds with DSCR of 1.4x, we could see losses of 20% if the recovery does not take hold. As such, we see Ambac losing $350 mm on Puerto Rico in a low case.

 

Detroit Exposure

In February, the state government took control of Detroit’s fiscal matters and appointed Kevyn Orr as the emergency manager. Orr attempted to reach a settlement with creditors in which they would receive 10 cents on the dollar, but creditors refused this proposal. After this failure to settle, Orr recommended that the city file for bankruptcy. Detroit filed for Chapter 9 Bankruptcy on July 19th, citing liabilities greater than $18 billion. Orr has chosen to group the unlimited tax GOs with the limited tax GOs despite their different rights.

Ambac has $170 mm in Detroit exposure: $77.6 mm in unlimited tax GOs and $92.7 mm in limited tax GOs. The impairment risk on the unlimited tax GOs has increased substantially given Orr’s proposed treatment. Due to these adverse conditions, we are assuming that Ambac will lose 100% on its insured Detroit credits in the low case, 90% in the base case, and 80% in the high case.

 

Summary Valuation

As noted in the introduction, we believe Ambac’s ultimate value will be based on adjusted book value.  In the 6/30 10-Q, Ambac reports adjusted book value as -424.9mm; the following table takes Ambac’s reported number and makes the adjustments described in the above sections to come to our ultimate valuation.

An alternative, but less rigorous methodology for estimating Ambac’s adjusted book value is to start with Statutory Capital and then scale it up by an adjustment factor, as determined from comps like MBIA and Assured Guaranty (using comps is questionable since their books were not subject to Fresh Start). This valuation serves as a rough check on the adjusted book value detailed above using a different set of accounting standards unique to insurance companies. As the table below shows, Statutory Capital has risen substantially over the last several quarters and yields a reasonably similar valuation to our base case from above.

 

Restarting the Insurance Business

We have not handicapped the likelihood and value of Ambac writing new bond insurance, but we believe this possibility offers meaningful additional value to investors in an upside scenario.

The fundamental drivers for the bond insurance business look highly positive going forward. Prior to 2008, seven AAA rated monoline insurers accounted for the vast majority of bond insurance (both ABS and municipal). The financial crisis crippled the financials of the bond insurers due to losses on ABS insurance. Currently, only Assured Guarantee is writing new insurance, as it still has an adequate Insurance Financial Strength (IFS) rating. Ambac, MBIA, FGIC, Syncora, and CIFG are all currently in run-off and lack the necessary ratings/statutory capital to write new business. As a result, Assured Guarantee has a virtual monopoly on the highly profitable, relatively low risk municipal bond insurance business.

Ironically, although Detroit and Puerto Rico are risks to the legacy portfolios of the monoline insurers, they have spurred investor demand for municipal bond insurance. The historical assumption that municipal bonds have no credit risk is being questioned. Moreover, as interest rates rise and debt service coverage is eroded, investors will be incented to demand insurance. We believe that these two factors will drive the municipal bond insurance market to grow at a healthy clip.

S&P requires that financial insurers have a minimum of ~$500mm in Statutory Policyholders’ Surplus to garner an A rating or better. In general, an A rating is necessary to write new insurance policies. While Ambac’s surplus sits at $393.7mm as of Q2, it has increased substantially in recent quarters (see above) and will likely exceed $500mm in the not-so-distant future. We expect that Ambac will ask to be rated and attempt to restart its insurance business. With only Assured Guarantee and potentially MBIA in the market, we see this possibility as hugely accretive to valuation.

 

Parting Thoughts


A Few Comments on the Warrants

As stated in the preliminary note, Ambac has 5.05mm in warrants outstanding at a strike of $16.67, expiring on April 30, 2023.  At current prices of $12.39, the warrants represent a levered bet on Ambac seeing considerable upside to current levels.  Given how many moving pieces there are and the levered nature of the capital structure, we believe the additional upside the warrants could provide does not justify the additional risk.  We see the risk-adjusted returns as superior for the common equity at current levels.

 

The Final Word

We believe that Ambac offers numerous ways to win and has a palatable downside case that we view as relatively unlikely to occur. The complexity and uncertainty associated with Ambac has led to a market dislocation, leaving us with an equity that has asymmetric risk/reward and defined catalysts for value realization. As transparency improves and the contingent assets/liabilities are realized, investors will re-price the equity to fair value. While there are many moving parts in the Ambac situation, we hope this writeup has been helpful in describing and quantifying the key value drivers.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

--Settlement of litigation claims or judgment in Ambac's favor
--Reversal of RMBS loss reserves
--Announcement of management compensation package
--Improving transparency around litigation claims, RMBS losses, and future business plans
--Strong housing market and continuation of improving RMBS collateral performance
--Acquisition of assets to utilize NOLs
--Restart of insurance business
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    Description

    ***I was unable to paste the graphs/tables - please use the following link to access the writeup***

    https://www.dropbox.com/s/mho58qsecajjf9f/AMBC_Long_Pitch_VIC.pdf


    Recommendation: Long Ambac Financial Group Common Stock (AMBC)

    Note: Ambac Financial Group has 45.0mm common shares outstanding at a current price of $20.80, giving the company a total market capitalization of $936.0 mm. Additionally, there are 5.05 mm warrants outstanding at a strike of $16.67, expiring on April 30, 2023. At the current price of the common stock, the diluted share count is 46mm (net of share repurchases with cash from warrant conversion) and the diluted market capitalization is $956.8mm. The common stock and warrants are listed on NASDAQ and began trading under the symbols “AMBC” and “AMBCW,” respectively, on May 1, 2013. Throughout the writeup, AFG refers to Ambac Financial Group (Holdco) and AAC refers to Ambac Assurance Corporation (Opco).

    *We apologize in advance for the length of this writeup, but felt it necessary given the number of moving parts in the situation.

     

    Thesis

    We believe that Ambac is a highly attractive post-reorg equity with ~100% upside to fair value in the base case and an upside case in which the investment will be a home run. This upside is accompanied by a palatable downside case in line with current trading prices. In our view, Ambac has substantially over-reserved for losses on insured RMBS and will likely recover more from litigation claims than it has booked, implying that reported adjusted book value significantly understates fair value. The complexity surrounding these contingent claims and the stigma associated with a post-reorg, RMBS/municipal bond insurer has deterred investor interest. As the improved performance of the underlying RMBS collateral is recognized, and Ambac announces the proceeds from its litigation, the market will be forced to revalue the equity. With management’s compensation package on the verge of being finalized, we anticipate that improved transparency and positive commentary will help close the gap between market and intrinsic value.

     

    Introduction

    Investors don’t like uncertainty. If you read any of the sell-side research on Ambac or talk with market participants, you will hear the constant refrain that the Ambac situation is “filled with uncertainty” and “investors should wait until there is further clarity.” This is exactly why there is an opportunity to own an asset with asymmetric risk/reward and numerous defined catalysts for value realization.

    The complexity of the Ambac situation is clearly discouraging investors from the name and has, in our view, led to a substantial misvaluation of the post-reorg equity. Investors cannot seem to grasp: 1. Structure of the rehabilitation plan, claims settlement, and Segregated Account; 2. Losses on insured RMBS; 3. Value of the litigation claims; 4. Value of the NOLs; 5. Exposure to Detroit and Puerto Rico; 6. The complicated financial statements (filled with a litany of confusing accounting). The natural response to this is to put minimal emphasis on the financials and embed a discount in the market value to compensate for uncertainty.

    The lack of clarity coming from Ambac’s management team is further depressing investor sentiment. Two recent examples: 1. Ambac did not hold a second quarter earnings call; 2. The company waited until October 10th to post a deck detailing its Puerto Rico exposure, even though Puerto Rico bonds began selling-off in mid-June. The expectation is that management will finalize their compensation package by the end of 2013. With this package set, we believe that management will move to improve transparency and tout the company’s upside potential. We anticipate management will reverse RMBS reserves, give further clarity on litigation claims, and potentially comment on Ambac’s intention to restart its bond insurance business.

    We believe that Ambac’s ultimate value will be based on adjusted book value, and we use this methodology as the basis for our analysis. To calculate adjusted book value, we start with Ambac’s reported adjusted book value, post Fresh Start accounting, and make further adjustments based on our estimates of certain contingent assets and liabilities. Essentially, Ambac is a big box of cash and financial assets, with the goal of keeping as many of those assets inside the box by the end of the run-off of the insurance book (the fewer the claims paid, the more assets left in the box). There is no rational reason why the market should not value this pool of assets at 1.0x fair value, with potential upside to adjusted book value coming in the form of a restarted insurance business.

     

    Situation Overview

    Prior to the financial crisis, Ambac wrote insurance for a wide variety of credits, including RMBS, municipal bonds, and student loan ABS.  Starting in 2007, many of the RMBS credits Ambac insured began to default, causing Ambac to incur significant losses.  Although Ambac managed to raise $1.5 billion of capital in March of 2008, in March of 2010, the Office of Insurance of the State of Wisconsin forced AAC (Opco) to establish a Segregated Account for approximately $35 billion of structured finance products with high probability of default.  The Segregated Account of AAC subsequently entered rehabilitation, with the goal being an orderly run-off of policies and claims. Pursuant to the Segregated Account Rehabilitation Plan, permitted policy claims are settled with a cash payment of 25% of the claim amount and the issuance of Surplus Notes for the remaining 75%. These Surplus Notes accrue interest at a rate of 5.1%, providing Ambac with a highly attractive long-term financing structure. In 2010, AAC also commuted most of its asset-backed CDO exposure for $2.6 billion in cash and $2 billion in newly issued Surplus Notes.  Despite these actions, AFG (Holdco) announced in June of 2010 that it would need to restructure through bankruptcy to reduce its debt burden and settle an outstanding IRS claim.

    After a protracted bankruptcy process, AFG emerged this past May with 45 mm common shares, 5.05 mm warrants at a $16.67 strike price, and significant NOLs.  As currently constructed, AFG is a holding company whose principal asset is AAC, itself comprised of the AAC General Account and the AAC Segregated Account (in rehabilitation).

     

    Analysis of Key Value Drivers

     

    Positive Adjustments to Book Value

    Loss Reserves on RMBS

    The crux of Ambac’s misvaluation lies in its gross loss reserves, particularly with regard to RMBS.  Specifically, Ambac has taken gross loss reserves of $5.843 billion against the RMBS credits it has insured. As Ambac described, the “adverse development in loss reserves established in prior years” was “primarily due to the continued deterioration of the collateral supporting structured finance policies, including RMBS.” It is key to note that Ambac did not Fresh Start its loss reserves upon emergence. To analyze what represents fair value for loss reserves, we need to develop a strong view on what has happened with the insured bonds and the underlying mortgage collateral.  Since Ambac reports a book with all of its exposures, we can look at the implied market prices for the RMBS credits that Ambac has insured.

    Note: To see data yourself, access http://www.ambac.com/authenticate.asp?file=Single_Risk_Exposures_by_CUSIP.xlsx

    On a cumulative basis, Ambac has $17.673 billion in outstanding RMBS credits that it has insured.  With loss reserves of $5.843 billion, Ambac is implying a haircut of 33.06% on these insured credits.  Ambac breaks out its par outstanding and reserves by both vintage and underlying collateral type, as seen in the tables below.

    As the tables illustrate, Ambac has substantial exposure to vintages in the boom years of 2005-2007, which led them to take very significant reserves against their exposures when the RMBS market collapsed.  If we think about the process of taking reserves, Ambac notes that its reserves represent “a probability-weighted average of all possible outcomes.”  However, history shows that Ambac’s reserves have lagged the market’s understanding of expected future losses. 

    Let’s take a moment to discuss our methodology for understanding the market’s expectation of future losses.  Mortgage-backed securities depend on the cash flows stemming from the underlying collateral, which is a pool of mortgages (in this case, residential mortgages).  When the market expects worse employment statistics and lower housing prices than were assumed in pricing the trusts, RMBS prices trade down as the underlying mortgage cash flows have become riskier and potentially insufficient to service the bonds, increasing the chance of bond impairment.  Here, you might ask, isn’t the purpose of bond insurance? In short, yes. Assuming that the insurance counterparty is solvent enough to make good on insurance claims, the RMBS should not trade down, as the insurance company is supposed to step in to make the payments.  However, in the case of Ambac, history suggests that the market does not necessarily trade in this fashion.

    Since the RMBS collateral is correlated along the lines of housing prices, in the event of substantial impairment, Ambac would likely not be solvent enough to make good on the claims. Given this logic and having spoken with market participants, we believe that Ambac-wrapped RMBS trade primarily on collateral recoveries and ascribe minimal value to the insurance. To further gauge this assumption, we constructed a representative index of non-insured RMBS with vintages, collateral-types, and underwriters similar to Ambac’s book. The graph below shows the relatively tight correlation between the market trading prices of Ambac’s book and our non-insured RMBS index, indicating that collateral performance is the primary driver of Ambac-wrapped RMBS. As a result, we believe we can look at market prices of Ambac-wrapped RMBS to gauge Ambac’s future insurance losses.

    Using Bloomberg and speaking with traders on the Street, we were able to price 83% of Ambac’s outstanding RMBS exposure, including a diversified sampling with vintages across all relevant time periods and collateral types.  The trends since 2007 show that Ambac’s reserves have lagged, then mirrored, and finally exceeded the market implied haircut (Market Haircut = 1 – Bond Price) on Ambac-wrapped RMBS securities. Specifically, if we look at 2007 based on our sample book, Ambac had reserved 6.18% of par while the market implied losses of 6.34% (i.e. bonds traded at 93.66).  By 2008, Ambac’s reserves were only up to 10.96%, while the market’s implied losses had exploded to 52.10%.  As the following table illustrates, Ambac’s reserves significantly lagged the market’s implied haircut through 2011.

    After 3 years of recovery in the RMBS market, by Q2 2012, the market implied haircut had essentially come in line with Ambac’s book reserves.  After Q2 2012, a dramatic disconnect between market pricing and Ambac’s reserves emerged. We believe this discrepancy stems from management’s incentive to be excessively conservative with reserves. The decision to over-reserve has the dual effect of creating a low hurdle for future “outperformance” and depressing the stock price prior to the granting of management’s stock-based compensation plan.

    To estimate future reserve reversal, we look to the current gap between market implied and book haircuts. As the table and graph above illustrate, the current market implied haircut is 16.11%. This represents a massive gap 16.95% gap on $17.673 billion par value between Ambac’s current reserves and market implied reserves.  To illustrate the substantial impact on valuation from this disconnect, we calculated the implied gain on reversing loss reserves if Ambac’s actual haircut is 15%, 20%, 25%, and 30%, as seen in the table below.

    Using the market’s implied haircut, the gain on loss reserves would be more than $3.1 billion, representing ~3.0x Ambac’s current market cap.  Even if we are to assume the market is undervaluing Ambac’s potential haircut by 10% (perhaps because of insurance value), the implied gain on loss reserves would still be more than $1.4 billion. Ambac will be forced to reverse these loss reserves over time, proving an upward catalyst in terms of book value and stock price.

     

    Litigation Claims

    Although Ambac has taken substantial gross loss reserves on its RMBS portfolio, Ambac appears well-positioned to recover some of that value via litigation recoveries. When Ambac insured RMBS, the originating institutions signed agreements with Ambac verifying that “underlying loans were not materially fraudulent or were the product of material underwriting defects, in breach of express representations and warranties” (Assured Guaranty vs. Flagstar Bank, Civ. 02375). Several recent court decisions have found that a wide array of originators breached their signed representations and warranties, leading to recoveries for counterparties like Ambac that were harmed by the false representations.

    With regard to breaches of representations and warranties, Ambac records its expected recoveries as “Subrogation Recoveries” (contra-liability to Loss Reserves), currently marked at $2,395 mm. These recoveries stem from Ambac’s outstanding cases against mortgage originators. As the table below shows, monoline insurers have been exceptionally accurate in forecasting subrogation recoveries, coming out slightly conservative in the three most prominent instances.

    *Note that MBIA outlined its expected subrogation recovery from Flagstar and Bank of America (BAC) as a combined value, and the actual subrogation recovery reflects the combined settlement amount.

    Based on past history of successful forecasting and conversations with those following the litigation, we believe Ambac’s representation and warranty recoveries will be largely in line with the $2,395 mm figure it has booked.

    Even though these recoveries are booked in the financials, the market has still reacted extremely favorably to successful past litigation. For example, after Countrywide (BAC) announced a settlement with MBIA for $1.6 billion, the market cap increased by 46% or about $850 mm the next day, even though recoveries were only about $200 mm above what had been booked. Given the uncertainty with which the market has viewed prior litigation claims, we believe that future settlements/judgments in Ambac’s currently filed litigation will provide a strong catalyst.

    The most notable current litigation case is against BAC, who we believe is strongly incentivized to settle. The Gibbs & Bruns settlement (BAC against BNY Mellon) was settled for 8.5 cents on the dollar for RMBS claims. This low amount can be attributed to BAC not being deemed directly responsible for the RMBS losses; instead, the financial crisis was blamed. If BAC were not to settle with Ambac and proceed to trial and possibly lose, the Gibbs & Bruns settlement could potentially be reversed and BAC would risk losing a significantly higher amount than if they just settled with Ambac. Justice Eileen Bransten is presiding over the Ambac-BAC case; this is important as she also presided over the MBIA-BAC case. The MBIA settlement came down to the fact that the First Department New York court ruled that causation for liability is no longer required in order to claim incurred losses. This ruling is crucial because the crux of BAC’s argument was that the losses incurred were due to the financial crisis. Therefore, we expect BAC to settle and not risk going to trial.

    Ambac will likely obtain additional litigation recoveries on fraud claims it has filed against mortgage originators.  The key element to understand is that fraud claims cannot be booked in the financials.  Thus, Ambac’s fraud claims, such as a $300 mm claim against JP Morgan, represent additional upside to the marked R&W subrogation recoveries.  These fraud claims have been successful recently, as evidenced by Countrywide being found fraudulent for its sale of RMBS to Fannie and Freddie.

    Our conversations with participants following the cases suggest $500 mm to $1,000 mm of additional litigation recoveries.  These recoveries will likely stem from the aforementioned JP Morgan fraud claim, additional fraud claims such as those against First Franklin/Merrill Lynch, and further R&W filings for parts of the insurance book that have not yet had subrogation taken.  We underwrite to a base case of $750 mm in additional litigation recoveries, with a low case of $500 mm and a high case of $1,000 mm.

     

    Repurchased AAC-Wrapped RMBS

    In managing its risk exposure, Ambac has repurchased, at a substantial discount to par, bonds that AAC insured.  Specifically, Ambac has par value of $1.42 bn in repurchased AAC-wrapped RMBS bonds (see row 497 of http://www.ambac.com/authenticate.asp?file=Invest_Sched.xlsx). Ambac repurchased these bonds for $921.5 mm (65 cents on dollar) and discloses the fair value as $1.08 bn (76 cents on dollar).

    Based on our conversations with various professionals and our understanding of the relevant accounting, Ambac has taken reserves against these bonds that remain on its books. Since Ambac now owns these AAC-wrapped bonds, any reserves should be completely reversed, allowing Ambac to recognize a gain. Since we have already adjusted the RMBS loss reserves to fair value, we only add back the difference between Ambac’s 76 cent mark on the bonds and par value. In all three cases, we add back 24% on $1.42 bn of par which yields a $341 mm increase to book value.

     

    NOL Valuation

    Ambac has $5,151.4 mm of NOLs (~$4,000 mm held within AAC and ~$1,200 mm within AFG) which are fully reserved against on its balance sheet. Given that Ambac is not currently writing new insurance, the NOLs initially appear to have limited value. However, there clearly is a possibility that Ambac receives approval to restart its insurance business; in this case, the NOLs will have substantial value. Furthermore, management has indicated that they would potentially raise capital and purchase a business similar to AAC to utilize the NOLs. In trying to put a value on the NOLs, we analyze them under two primary scenarios: 1. Restart of the insurance business in 2015; 2. Raise capital and purchase assets (high and low case).  We also weight the possibility that Ambac is unable to unlock any value from its NOLs.

    In our valuation scenario where Ambac restarts its insurance business in 2015, we looked to the historical cash taxes and effective tax rate of the company prior to the financial crisis. Using the average 2001-2007 cash taxes of $171.2mm divided by the effective tax rate of 26.5%, we get $646.2mm as the NOL utilization amount going forward. In the case where Ambac raises capital to purchase AAC-like assets, we constructed a high and low case with varying assumptions on size of equity raise, leverage, and unlevered ROI. After evaluating these scenarios, we came to a probability weighted NOL value of $256.5mm. The valuation output is summarized in the table below.

    In thinking about the value of NOLs within the context of the larger story, we feel that many analysts have overstated the potential impact of NOLs on valuation.  In particular, the idea of purchasing a new business to utilize the NOLs doesn’t derive as much value as many analysts seem to believe.  Instead, the situation where the NOLs really benefit valuation is if Ambac receives permission to restart its insurance business, a situation in which value would likely be so high that the impact of NOLs would be minimal on a home run investment. While the $5,151.4mm headline NOL number appears to represent a lot of value, the NOLs are not a key driver of the Ambac misvaluation story.


    Insurance Intangible Asset and Goodwill

    In making adjustments to GAAP book value, Ambac backs out $2.136 billion of value for insurance intangible asset and goodwill ($1.621 bn for insurance intangible, $514.5 mm for goodwill). Understanding this valuation adjustment is an exercise in understanding Ambac’s Fresh Start accounting.

    In applying Fresh Start, Ambac “adjusted the historical carrying value of its assets, liabilities, and non-controlling interests to fair value,” with reorganization value in excess of fair value of “identified tangible and intangible assets” being attributed to goodwill (see table below).  

    Given that Ambac sees goodwill as deriving value from neither tangible nor intangible assets, we agree with Ambac’s decision to back goodwill out of book value.

    However, we believe that Ambac should not have backed out the insurance intangible asset from book value.  The insurance intangible asset “represents the fair value adjustment for financial guarantee insurance and reinsurance contracts.” Due to certain accounting rules, “insurance and reinsurance assets and liabilities continue to be measured in accordance with existing accounting policies and an intangible asset is recorded representing the difference between the fair value and carrying value of these insurance and reinsurance assets and liabilities.”

    The insurance intangible asset relates to a number of B/S accounts: premium receivables, reinsurance recoverable on paid and unpaid losses, deferred ceded premium, subrogation recoverable, losses and loss expense reserve, unearned premiums, and ceded premiums payable. Since we are making fair value adjustments to the loss reserve, we do not want to double count and therefore only add back a portion of the insurance intangible. We compute this amount as the total amount of the intangible ($1,621.6 mm) less our RMBS loss reserve reversal in the low case ($1,418 mm), yielding a $203.6 mm increase in book value. In the low case, we have essentially assumed that Ambac’s fair value adjustment of $1,621.6 mm is not overly conservative and simply split this amount into two separate add-backs. In the base and high case, we use higher estimates for RMBS loss reserve reversal and therefore adjust book value upwards by more than the insurance intangible.

     

    Negative Adjustments to Book Value

    Student Loan Reserves

    While the gross loss reserves for RMBS credits appear materially overstated (to the aforementioned tune of $1.4-3.0+ billion), we believe that student loss reserves may be understated.  During the boom lending years, for-profit education loans proliferated, and the current market perception of many of these loans is quite negative.  Specifically, using the same methodology as we used for RMBS credits, we were able to price 52% of the AAC-wrapped student loan ABS bonds.  On these bonds, the implied market haircut is 26.58% (vs. Ambac’s book haircut of 18.52%).  However, a substantial portion of the book that we have not priced ($1.35 billion) comes from bonds secured by student loans originated by National Collegiate Trust (First Marblehead).  The average National Collegiate bonds we priced have an implied haircut of 42.7%.  If we were to assume the unpriced National Collegiate bonds look the same, our implied market haircut for the book reaches 31.5%, suggesting Ambac may be under-reserved in a downside scenario.

    In thinking about specifics, it is important to take note of a key dynamic in expected student loan losses: the difference between for-profit and not-for-profit issuers.  As Ambac describes:

    “Collateral for the For-Profit Issuers consists of private loans which do not have any federal guarantee as to defaulted principal and interest. Collateral for the Not-For-Profit Issuers consists of both FFELP and private student loans. Private loan defaults have been on the rise since the credit crisis in 2008 began. Elevated unemployment rates, combined with high student loan debt levels will continue to put pressure on borrower’s ability to pay their loans.”

    As a result of the differences in collateral and government backing, Ambac has taken large reserves on its for-profit issuers and substantially smaller reserves for its not-for-profit issuers.

    Based on our analysis, we view Ambac’s book haircut of 18.5% as perhaps 8% under-reserved in the base case, implying an additional $463 mm in student loan losses. In underwriting the low and high case, we include additional losses of $600 mm and $200 mm, respectively. Ambac notes that in what they describe as “the highest stress scenario,” these losses might reach $753 mm, indicating that our adjustments are quite conservative.


    Puerto Rico Exposure

    After Detroit filed for bankruptcy, investors looking for the next municipal crisis turned to Puerto Rico.  As the graph below illustrates, Ambac’s share price has closely followed the weakness of the S&P Municipal Bond Puerto Rico Index (SAPIPR), plummeting 45% from a high of $27.25 to a low of $15.03 in 5 months.

    The market’s reaction to the Puerto Rico situation shows that investor understanding of Ambac’s obligations is limited. The Excel file we mentioned in the RMBS section also contained all of Ambac’s Puerto Rico exposure (the Excel was published on June 30th). Yet, when the Barron’s Puerto Rico article broke, the market acted as if it had absolutely no understanding of Ambac’s Puerto Rico exposure.  It took Ambac’s publication of its exposure in a slide deck to calm investors; the stock rallied 15% in the two days after Ambac published its deck, even though the information had already been public.

    The table below shows that out of Ambac’s $2.5 billion of Puerto Rico exposure, only 10% is Commonwealth General Obligation (GO).  The remaining 90% is backed by pledged revenue streams from sources like toll receipts, and sales, gas, rum, and hotel occupancy taxes.  Ambac’s total Puerto Rico exposure is summarized in the table below.

    Aside from the sufficient debt service coverage ratios highlighted in the table above, revenue-backed bonds are safer for the following reasons:

    Sales Tax Revenue Bonds (COFINA): $808mm exposure

    Highway and Transportation Authority: $760mm exposure

    Infrastructure Financing Authority – Rum Tax: $574mm exposure

    Convention Center District Authority Hotel Tax: $137mm exposure

    The GO bonds are admittedly riskier considering Puerto Rico’s shrinking economy.  The commonwealth has been suffering from a recession for 7 straight years and has a 15% unemployment rate.  It currently carries $70 billion of outstanding debt and a heavy $17,000 per capita debt burden.  In addition, Puerto Rico depends on access to capital markets in order to balance its budgets.  With the current high-yield environment, Puerto Rico is avoiding any new issuances since it has sufficient funding to support operations until at least June 30, 2014, but a sustained loss of market access could pose a risk in the future. 

    All is not bad, though.  Recent reforms put in place by newly elected Gov. Alejandro Padilla offer signs of improvement.  For example, the pension reform plan reduces contractual obligations that the Employee Retirement System has to make to public employees while increasing the member contributions and retirement age, which will help reduce the $1.3 billion deficit.  Furthermore, he has expanded the tax base to include services like consulting and B2B activity while enforcing stricter measures against tax evasion.

    Investors should be cognizant of the difference between the situations in Puerto Rico and Detroit.  Whereas Detroit had no satisfactory plan to address their fiscal issues and relied on an Emergency Manager, Puerto Rican leaders are expressing that they have every intention of honoring the commonwealth’s debt and avoiding a restructuring or default.  In an October 15, 2013 webcast, Governor Padilla remarked, “We will do everything, and I repeat, everything that is necessary for Puerto Rico to honor all its commitments.  These are not just constitutional obligations but also moral obligations.”

    This segues into a discussion about the legal protections that the Puerto Rican Constitution has in order to protect bond holders in the off chance of a non-payment.  Article VI Section 8 states:

    “In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law.”

    In other words, the public debt of Puerto Rico has a priority claim on resources and must be paid prior to other obligations if there are insufficient funds for debt service.

    Base Case
    To estimate the losses from Puerto Rican debt exposure, we still worry that despite Governor Padilla’s aggressive efforts to meet obligations, the GO bonds will not be paid in full.  In our base case, we make the assumption that the GO obligations are completely wiped out. Given that all of the revenue bonds have DSCR in excess of 1.4x, we assume that these bonds recover in full.  While the ultimate distribution of haircuts may vary, we see $250 mm in losses as reasonably conservative given the fear-mongering about the municipal bond market post-Detroit. 

    High Case
    A more bullish case does not call for a complete loss on the GO bonds.  Improvement in the economy and Puerto Rico’s focus on repaying its “moral obligations” lead to a scenario where the GOs only take a modest haircut.  Given that current yields are in the 7% range (10-11% including tax-free benefits) on these long-dated obligations, we see scenarios where GO holders take a 20% haircut as reasonable.  In the high case, losses are assumed to be $50 mm. 

    Low Case
    A bearish case calls for not only a total loss on GO bonds but also on some of the less secure revenue-backed bonds. We view bonds issued by Infrastructure Financing Authority (rum tax) and Convention Center District Authority (hotel tax) as higher risk.  The bonds backed by COFINA and the Highway and Transportation Authority are safer, as they have more consistent streams of revenue and are protected from the Constitution’s claw-back provision.  With approximately $500 mm in revenue bonds with DSCR of 1.4x, we could see losses of 20% if the recovery does not take hold. As such, we see Ambac losing $350 mm on Puerto Rico in a low case.

     

    Detroit Exposure

    In February, the state government took control of Detroit’s fiscal matters and appointed Kevyn Orr as the emergency manager. Orr attempted to reach a settlement with creditors in which they would receive 10 cents on the dollar, but creditors refused this proposal. After this failure to settle, Orr recommended that the city file for bankruptcy. Detroit filed for Chapter 9 Bankruptcy on July 19th, citing liabilities greater than $18 billion. Orr has chosen to group the unlimited tax GOs with the limited tax GOs despite their different rights.

    Ambac has $170 mm in Detroit exposure: $77.6 mm in unlimited tax GOs and $92.7 mm in limited tax GOs. The impairment risk on the unlimited tax GOs has increased substantially given Orr’s proposed treatment. Due to these adverse conditions, we are assuming that Ambac will lose 100% on its insured Detroit credits in the low case, 90% in the base case, and 80% in the high case.

     

    Summary Valuation

    As noted in the introduction, we believe Ambac’s ultimate value will be based on adjusted book value.  In the 6/30 10-Q, Ambac reports adjusted book value as -424.9mm; the following table takes Ambac’s reported number and makes the adjustments described in the above sections to come to our ultimate valuation.

    An alternative, but less rigorous methodology for estimating Ambac’s adjusted book value is to start with Statutory Capital and then scale it up by an adjustment factor, as determined from comps like MBIA and Assured Guaranty (using comps is questionable since their books were not subject to Fresh Start). This valuation serves as a rough check on the adjusted book value detailed above using a different set of accounting standards unique to insurance companies. As the table below shows, Statutory Capital has risen substantially over the last several quarters and yields a reasonably similar valuation to our base case from above.

     

    Restarting the Insurance Business

    We have not handicapped the likelihood and value of Ambac writing new bond insurance, but we believe this possibility offers meaningful additional value to investors in an upside scenario.

    The fundamental drivers for the bond insurance business look highly positive going forward. Prior to 2008, seven AAA rated monoline insurers accounted for the vast majority of bond insurance (both ABS and municipal). The financial crisis crippled the financials of the bond insurers due to losses on ABS insurance. Currently, only Assured Guarantee is writing new insurance, as it still has an adequate Insurance Financial Strength (IFS) rating. Ambac, MBIA, FGIC, Syncora, and CIFG are all currently in run-off and lack the necessary ratings/statutory capital to write new business. As a result, Assured Guarantee has a virtual monopoly on the highly profitable, relatively low risk municipal bond insurance business.

    Ironically, although Detroit and Puerto Rico are risks to the legacy portfolios of the monoline insurers, they have spurred investor demand for municipal bond insurance. The historical assumption that municipal bonds have no credit risk is being questioned. Moreover, as interest rates rise and debt service coverage is eroded, investors will be incented to demand insurance. We believe that these two factors will drive the municipal bond insurance market to grow at a healthy clip.

    S&P requires that financial insurers have a minimum of ~$500mm in Statutory Policyholders’ Surplus to garner an A rating or better. In general, an A rating is necessary to write new insurance policies. While Ambac’s surplus sits at $393.7mm as of Q2, it has increased substantially in recent quarters (see above) and will likely exceed $500mm in the not-so-distant future. We expect that Ambac will ask to be rated and attempt to restart its insurance business. With only Assured Guarantee and potentially MBIA in the market, we see this possibility as hugely accretive to valuation.

     

    Parting Thoughts


    A Few Comments on the Warrants

    As stated in the preliminary note, Ambac has 5.05mm in warrants outstanding at a strike of $16.67, expiring on April 30, 2023.  At current prices of $12.39, the warrants represent a levered bet on Ambac seeing considerable upside to current levels.  Given how many moving pieces there are and the levered nature of the capital structure, we believe the additional upside the warrants could provide does not justify the additional risk.  We see the risk-adjusted returns as superior for the common equity at current levels.

     

    The Final Word

    We believe that Ambac offers numerous ways to win and has a palatable downside case that we view as relatively unlikely to occur. The complexity and uncertainty associated with Ambac has led to a market dislocation, leaving us with an equity that has asymmetric risk/reward and defined catalysts for value realization. As transparency improves and the contingent assets/liabilities are realized, investors will re-price the equity to fair value. While there are many moving parts in the Ambac situation, we hope this writeup has been helpful in describing and quantifying the key value drivers.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    --Settlement of litigation claims or judgment in Ambac's favor
    --Reversal of RMBS loss reserves
    --Announcement of management compensation package
    --Improving transparency around litigation claims, RMBS losses, and future business plans
    --Strong housing market and continuation of improving RMBS collateral performance
    --Acquisition of assets to utilize NOLs
    --Restart of insurance business

    Messages


    SubjectAmbac AMPS
    Entry12/02/2013 02:03 PM
    Memberbroncos727
    Alliance Semiconductor (ALSC) may be a decent way to play the AMPS. Working from their annual report (posted on their website), at the end of April 2013 ALSC had 1,797 AMPS and approximately $4.7 million cash. ALSC sold 320 AMPS for $3 million in April - 38 cents on the dollar, giving $21.5 million adjusted equity or $0.65 cents per ALSC share based on the AMPS trade in April. ALSC also has an $88 million NOL and is participating in a lawsuit against AMBAC Assurance alleging that AMBAC Assurance wrongfully converted the original securities purchased by ALSC into AMPS. It has rallied the past few weeks and is too expensive for me. I suspect someone from VIC!

    SubjectRE: Over-reserved methodology
    Entry12/16/2013 02:54 PM
    Membermip14
    Getting comfortable with the lack of insurance price-in was certainly a difficult part of the process.  The key element was understanding the larger movement in the RMBS markets.  Given that the non-insured RMBS securities have traded in a similar fashion, it seems clear that the underlying collateral has seen dramatic improvements.  This dynamic can also be seen in pure mortgage insurers like MGIC, which have had a terrific year.  In making assumptions about the impact of the insurance, we agree that the market may be pricing in some insurance, and perhaps a greater level than it has historically.  Yet even with the reversals we expect, the implied losses are still higher than the market haircut, with that gap representing the value we attribute to insurance.  Now, you could certainly make the argument that the entire gap  between Ambac and market pricing is due to insurance.  However, that would imply that Ambac management correctly predicted the trading patterns in RMBS securities, and management was two years ahead of the market in calculating ultimate losses.  We do not buy this argument.  Instead, we think it more likely that the collateral has seen significant improvements, with minimal value now being attributed to insurance, which will lead to the described reversals over time (which actually began this past quarter).  Hope this helps.      

    SubjectPR financing?
    Entry12/20/2013 10:05 AM
    Memberpcm983
    I hear a rumor going around that there is PR financing by large multi national banks in the offing! anybody hear anything on this matter or have anymore color?

    SubjectRE: Statutory Interest on R&W Claims
    Entry01/09/2014 09:35 PM
    Memberstraw1023
    mip, 
     
    Are you sure you get compounding? The Gyrodyne (GYRO) interest may be under a different rule, but it was a NY state case and statutory interest was not compounded.
     
     

    SubjectRE: Statutory Interest on R&W Claims
    Entry01/09/2014 09:37 PM
    Memberaagold
    Well that seems like mighty good news! 
     
    How sure are you (or your lawyers) that this statutory interest will actually be awarded?  Has this been awarded in other similar cases?  And how are you deriving your low and high case values?
     
    Thanks,
    aagold

    SubjectRE: RE: RE: Statutory Interest on R&W Claims
    Entry01/09/2014 10:28 PM
    Memberaagold
    mip,
     
    In your write-up you said that BAC would be highly likely to settle out of court because they wouldn't want to risk having the Gibbs and Bruns settlement reversed.  Are you now changing your opinion on that matter (since you're now saying Ambac is likely going to court)?
     
    I'm also a bit confused about what assumptions Ambac is making in regard to subrogation recoveries.  Are they assuming (in their booked expected recoveries) that they're going to get paid 100 cents on the dollar for their RMBS claims?  What's confusing me is that in your write-up you said the Gibbs and Bruns settlement was for only 8.5 cents on the dollar for RMBS claims.  There's an enormous difference between 100 and 8.5 cents on the dollar, so this just sounds odd.  What about the three other cases you cited ( in the Comparison of Expected and Actual Subrogation Recoveries table)?  Did they all get 100 cents on the dollar for their RMBS claims?
     
    And is it correct that none of these R&W cases has gone to court yet - i.e., they've all been settled or are still pending trial - and therefore nobody has received this statutory interest award yet, but you think Ambac will be the first one to go to court and therefore get this interest award?  I don't know, it just sounds a bit too optimistic to have your *base* case be a 100% certainty that this interest will be awarded.  I think there needs to be a significant haircut to account for uncertainty (at least 50% for the base case, just to pull a number out of the air), particularly if Ambac would be the first one to actually receive that award.
     
    - aagold

    SubjectFollow-up to Opco's subrogation question
    Entry01/09/2014 11:10 PM
    Memberaagold
    mip,
     
    I just re-read your response to opco's question about reversal of subrogation recoveries if there's a reversal in expected RMBS losses.
     
    You noted that there's no clear relationship between the two because the RMBS reserves correspond to the expected losses on the superset of conforming and non-conforming loans, while the subrogation recoveries correspond to only the non-conforming loans.
     
    While I agree that the relationship is unclear, it seems to me that your analysis implicitly assumes that the anticipated reversal of expected RMBS losses applies 100% to conforming loans and 0% to non-conforming ones, otherwise the subrogation recovery reversals opco mentioned will be present, right? If I'm understand things correctly, then isn't such an assumption inappropriate for your base case (since it seems maximally optimistic regarding that particular issue)?
     
    Thanks,
    aagold

    SubjectRE: RE: Follow-up to Opco's subrogation question
    Entry01/10/2014 09:57 AM
    Memberaagold
    mip,
     
    Thanks for your replies.
     
    I'm still quite confused about how changes in expected future RMBS losses can/will affect subrogation recoveries.  First of all, when discussing subrogation recoveries I think we need to distinguish clearly between (a) historical claim payments that have already occurred and (b) expected future losses.
     
    So one question I have is, what percentage of booked subrogation recoveries are attributable to (a) rather than (b)?  Because clearly, any improvement in the forward-looking outlook for RMBS can affect (b) only, right?
     
    If we then focus our attention on (b) only, my next question is one of mechanics and practicality.  Let's say this case goes to trial, Ambac wins, the judge awards Ambac $2.362B (plus statutory interest), and the defendants deposit the money in Ambac's bank account.  Ok, so now what happens if it turns out the losses aren't as bad as Ambac currently thinks they will be?  Do they have to give the money back?
     
    - aagold

    SubjectRE: RE: RE: RE: Follow-up to Opco's...
    Entry01/10/2014 04:20 PM
    Memberaagold
    mip,
     
    Thanks, your replies have been very helpful.  Also, just so you know, your very good write-up convinced me and I now own the stock.
     
    - aagold
     
     

    SubjectTwo more questions for mip14
    Entry01/16/2014 12:22 PM
    Memberaagold
    mip14,
     
    As I dig deeper into your write-up some more questions have arisen.
     
    1) Interest rate effects.  Your analytical method fundamentally uses RMBS prices as a market-based indicator of future Ambac losses.  Doesn't that method ignore the effect of interest rates on bond prices?  How do current interest rates compare to the weighted-average interest rates in place at the time these bonds were issued?
     
    2) Repurchased AAC-wrapped RMBS.  You claim in your write-up that Ambac maintains loss reserves for repurchased AAC-wrapped RMBS.  As I think more about it I'm starting to doubt that claim, for the simple reason that it makes no economic sense.  This factor accounts for $341M of your book value adjustment, so it's non-trivial.  Have you spoken to Ambac's CFO about this issue, or tried to get on a conference call to ask about it?  What evidence do you have that a bond insurance company would use an accounting method so clearly at odds with economic reality?  Also, you calculate the $341M adjustment using Ambac's $0.76 mark on these bonds, so the interest-rate issue discussed above applies here as well.
     
    There's a lot of meat on the bone with this write-up, so sorry if it's taking me a while to get all my questions out there.
     
    Thanks,
    aagold
     

    SubjectRE: Two more questions for mip14
    Entry01/16/2014 01:04 PM
    Memberaagold
    Some more thoughts on 2) :
     
    If the market believed Ambac is solvent, then the AMBC-wrapped bonds would trade at 100 cents on the dollar assuming interest rates are the same now as when the bonds were issued.  So, in that case it would make sense to reserve for repurchased RMBS since they're only worth 100% of par if the insurance subsidiary pays out the RMBS losses.  So I guess I can understand why the insurance subsidiary still reserves for losses when the holding company repurchses RMBS.  But that whole accounting treatment stops making sense when the RMBS assets are marked at a deep discount to par, which I guess is another way of explaining why you're adding back that $341M of book value - you're re-marking those assets to 100% of par rather than 76% of par since you're assuming Ambac is solvent.
     
    So I guess I understand that now, but it just re-emphasizes the importance of interest rates in this whole analysis, as marking those assets to 100% of par only makes sense when interest rates haven't changed.
     
    - aagold
     
     
     
     

    SubjectGraph vs. Table inconsistency
    Entry01/16/2014 01:52 PM
    Memberaagold
    mip14,
     
    Eyeballing the graph on page 5 of your write-up, it looks like "Ambac Book" currently trades at ~$0.90 and "Non-insured RMBS" currently trades at just over $0.80.  What's confusing me is that the Reserves vs. Market table states the current market haircut for Ambac-insured RMBS is 16.11%, not the ~10% haircut implied by the earlier graph.
     
    - aagold

    SubjectPrepay rates
    Entry01/16/2014 02:35 PM
    Memberaagold
    mip14,
     
    Sorry to bombard you with questions today, but as I mentioned before I do own the stock now (and it's a substantial position for me), and I'm realizing that this investment is even more complex than I thought it was.
     
    I mentioned earlier that your analysis uses RMBS price as an indicator of future Ambac losses, and that I believe changes in interest rates are being excluded from that analysis.  Another thing being excluded, I believe, is changes in expected prepayment rates.
     
    Since I would assume interest rates are now significantly lower than they were at the time the RMBS were issued, it stands to reason that current RMBS prices are higher than would have been the case had interest rates remained the same.  I'm guessing prepay rates are having the opposite effect - interest rates went down, causing more prepayments, thus causing RMBS prices to be lower than would have been the case had prepay rates remained the same.  My guess is that the interest rate decline outweighs the (presumed) prepay rate increase, but this is all guesswork.
     
    - aagold

    SubjectRE: aagold questions
    Entry01/16/2014 03:29 PM
    Membermip14
    From the top:
     
    1.) I believe the best place to first address your concern is to think about interest rates over time.  Market pricing of Ambac's RMBS book bottomed in January of 2010, and reached similar depths in January of 2012.  In January of 2010, the 5 year yield sat at 2.65% with the 10 year yield at 3.85%.  From that data point, you might conclude that you have a point on interest rate risk, given that yields are about 100 bps lower today.  However, if we look at the January 2012 market bottom, 10 year yields were 1.97% and 5 year yields just 0.89%.  Thus, if we think about the rally in RMBS prices that we are really trying to track, the rally has taken place in the face of an 80-100 bps rise in interest rates. The story has been one of distressed assets rising in value, rather than a move in interest rates.  As previously mentioned, the distressed assets have done better due to rising housing prices, fewer delinquencies, etc (the underlying performance of the collateral).  If you'd like to see it for yourself, just pull up one of the RMBS CUSIPs and look at how its traded versus movements in interest rates.  There isn't a correlation.  What's driving the CUSIPs is the performance of the underlying collateral, which is natural for distressed assets.  Where interest rates might matter is if you believe that rising interest rates will cause housing prices to decline.  While I believe interest rates may slow the rise in housing prices, I don't foresee declining prices from these levels.  
     
    2.) It makes economic sense to maintain the loss reserves for repurchased RMBS contracts because the contract has not expired.  Ambac still has insured these bonds and could theoretically sell them back into the market once they have reached par value (or some greater value than the repurchase price).  In such a case, Ambac would still be liable for any losses.  Since the liability has not been terminated, the reserve cannot be terminated either.  
     
    3.) The graph on page 5 isn't illustrating a discount.  It just tracks the performances of the Ambac CUSIPs versus a non-insured RMBS index to show that the market is trading these things on collateral, not on insurance.  The graph is indexed, as the purpose is not to track discounts.
     
    4.) As to pre-pay rates, the key to understand is that nobody was making pre-payments on their mortgages when their mortgages were underwater.  It would make no sense to pay 110% of the value of your house on a mortgage ahead of time.  I don't think prepayment risk is having a huge impact in this case.  
     
    Hope these answers help.  

    SubjectRE: RE: aagold questions
    Entry01/16/2014 04:48 PM
    Memberaagold
    Thanks for the quick reply, mip. Here are some follow-ups on items (1) and (4):
     
    I've done a little more digging on the interest rate issue.  One thing that's clear to me, which wasn't before, is that loss reserves are booked by taking the *present value* of expected losses, they don't represent undiscounted expected losses.  So changes in interest rates should affect booked loss reserves also, not just RMBS prices, right?
     
    One thing I can't quite get a clear answer on, from reading the 2012 10-K, is what discount rate is used in the present value calculation for loss reserves?  In item 7 of the 10K it says a 5.1% discount rate is used for loans that have already defaulted and 1.7% (blended risk-free rate) for loans that haven't defaulted but have had some credit deterioration.  I don't know if this Item 7 I'm looking at covers all loss reserves or just one portion.
     
    I don't dispute that RMBS trade primarily on the basis of the underlying collateral when they're distressed, but here's what's bugging me.  Your analysis attempts to predict what Ambac will ultimately end up booking as loss reserves by looking at RMBS prices.  I don't dispute that there's some logical relationship between these two things, but what evidence do we have that they're exactly *the same*? 
     
    In other words, I think it's clear that if RMBS prices are higher now than they were in the past, then it stands to reason that Ambac's loss reserves will trend down.  But that basic statement of trend/correlation is a whole lot different than making the quantitative claim that if Ambac has $X of insured RMBS credits, and the RMBS trade at P% of par, then booked loss reserves will end up being (100 - P)% * $X.  I mean, doesn't that seem a bit too simple?  For one thing, it assumes that the discount rates used by Ambac for their loss reserve present value calculations (as discussed above) are built in to the prices of RMBS.  And like I said before, it ignores the effect of prepayment rates which may affect RMBS prices differently than they affect booked loss reserves.
     
    Thanks,
    aagold

    SubjectRE: RE: RE: aagold questions
    Entry01/16/2014 06:24 PM
    Membermip14
    You are correct that loss reserves are the present value of expected losses.  If interest rates go up, the present value of expected losses go down assuming no time has passed.  I don't think this point is key in telling the story here, but you are correct that interest rates matter for loss reserves. 
     
    The analysis put forth does not attempt to say that booked loss reserves will end up being exactly (100-p%)*X.   This analysis intends to give some estimate of underlying value and what loss reversals will ultimately look like.  Obviously, we can disagree on what margin of safety versus that estimate to underwrite AMBC at, but I believe this approach is a useful tool.  If you'd like to attempt to guess how the market discounts losses versus how Ambac discounts losses, that's a fair strategy, but I believe to do so would be to engage in false precision.  The story of loss reserves on housing being reversed remains ongoing (Citi released loan loss reserves today partially due to increased housing prices) and the approach laid out represents one estimate of what reserves will ultimately look like.  

    Subjectwrt233: any thoughts?
    Entry01/16/2014 09:02 PM
    Memberaagold
    wrt233,
     
    As I recall you did quite a bit of analysis of MBIA during the financial crisis, so I'm curious what you think about AMBC and/or MBI and AGO as investments now.
     
    What do you think of mip14's analysis of AMBC here, do you agree with it?
     
    Thanks,
    aagold

    SubjectI don't follow it anymore
    Entry01/16/2014 10:51 PM
    Memberwrt233
    Sorry, but I haven't followed MBIA, AMBC or the sector in years.

    SubjectRE: Follow-Up Idea – Long AAC-Wrapped Student...
    Entry01/17/2014 05:27 PM
    Memberaagold
    This sounds like a very interesting idea.  Unfortunately ABS don't seem to be available through Fidelity or Interactive Brokers, the two brokers I use, and these CUSIPs don't seem to show up on TRACE (using the FINRA website).  I guess I'll have to open an account with a full-service broker if I really want to invest in these.  How liquid are these securities?
     
    Also, I'm not sure I fully understand the situation because (a) you didn't talk about coupons or yields, only price, and (b) you wrote, "Obviously, to properly gauge the returns, you would need to forecast when losses on ABS will be realized and when Ambac will ultimately pay-out on the insurance".
     
    I don't get (b); why does one care when Ambac will ultimately pay out on the insurance?  Aren't you getting interest and principal payments while the RMBS is performing, and then if it defaults you get 25% in cash and the rest in 5.1% surplus notes? Sounds too good to be true, as long as you believe Ambac is long-term solvent.  You can really buy insured bonds 40-60 cents on the dollar?  I don't get it, I must be missing something.
     
    Oh, maybe I just figured out what I was missing.  Since these are student loans, there's probably a lengthy deferral period during which no interest is due.  So it's sort of like a zero-coupon bond in that sense; the "interest" comes in the form of a price discount when you buy the bond.  Is that it?  If so, then buying these at 40-60 cents on the dollar is not comparable to a "normal" bond where interest starts being paid immediately.
     
    Thanks,
    aagold
     
     

    SubjectRE: RE: Link to Updated Book Value
    Entry02/27/2014 02:15 PM
    Membermip14
    Hi Otto,
     
    The $90 target price is somewhere between a base/bull case and reflects our understanding of the current information.  As our commentary suggests, we have become increasingly confident that Ambac will recover par + accrued, rather than 60%, plus we think their claims far exceed our initial estimates in light of the BOA disclosure.  The 1.888 billion is in recoveries beyond what Ambac already has marked (2.4 billion), as that 2.4 billion is already a part of Ambac's adjusted book value.  Add the two together and you come to the 4 bilion+ number we mentioned.  Hope that helps.
     
     

    Subjectquestion
    Entry02/27/2014 06:30 PM
    Memberpathbska
    Hi - thanks for the idea. I had a couple questions.
     
    In the $4 billion of potential putback proceeds, how much do you assume is allocated to the segregated account? Also, of the amount that AMBC receives (net of segregated account), how do you think the company deploys those proceeds?
     
    Thanks.

    SubjectManagement incentives / comp
    Entry02/28/2014 01:12 AM
    Memberlatticework
    Thanks for a well-articulated thesis as well as some very helpful color in the discussion/questions dialogue. It has cleared up several questions I had, but I did want to ask about any update/news on the management incentive comp packages.
     
    It seems that many key elements of the value realization here depend on re-alignment of management's incentives to go out and market the company with more clarity on reserve reversals, litigation claims, plans for NOL utilization, etc.  Has any detail on their comp packages been released yet? If not, what do you envision would be the likely compensation structures / incentive plans (i.e. on what KPIs might they be compensated) with respect to incentivizing management to pull the value creation levers you articulated very well?  I realize this may just be intellectual spitballing at this point, but it would be helpful to be able to pre-emptively understand how we may interpret potential comp package structures once released, especially in terms of how quickly management will be incentivized to act. 
     
    Thanks,
    cmg90
     

    SubjectRE: rw pressprich
    Entry03/11/2014 11:24 AM
    Memberdanconia17
    finally got my hands on the report.  
    it seems like in their base case they expect $3.4B from R&W.
    However, due to the way they waterfall the cash flows, they do not expect the common to capture much of that.  In fact they are only giving credit for the NOL tolling payment and junior surplus.  And they assume that the AMPs get paid off...which I disagree with since they could keep that outstanding for zero until they pay dividends to the HoldCo, and even then they only have to pay L+200.
     
    So high level, i don't think there is much disagreement on the R&W victories nor other items of potential value creation...it just appears that he thinks less of that can flow through to the common shareholders...
     
     

    SubjectLink to RW Pressprich report
    Entry03/11/2014 04:38 PM
    Memberwrt233

    SubjectRE: Link to RW Pressprich report
    Entry03/11/2014 04:45 PM
    Memberaagold
    Thanks wrt233, very much appreciated.
     
    - aagold

    SubjectInvestor day on March 27th
    Entry03/11/2014 09:09 PM
    Memberwrt233
    I'm going to be out of the country that week, so I'm going to miss Ambac's investor day on March 27th. If anyone attends and can take notes and post them here, I'm sure I speak for all of us in expressing gratitude.

    SubjectRE: Investor day on March 27th
    Entry03/11/2014 09:24 PM
    Memberaagold
    wrt,
     
    I'm surprised to see that your interest in this name has resurfaced.  I asked back on 1/16 what you thought of mip's analysis (comment #44) and you replied that you don't follow this space anymore.  Just curious what got you interested again...
     
    - aagold

    Subjectmore positive news
    Entry03/13/2014 11:48 AM
    Memberotto695
    On March 11, 2014, the rehabilitator of the Segregated Account of Ambac Assurance Corporation (the "Segregated Account") informed Ambac Financial Group, Inc. ("Ambac") that the United States Internal Revenue Service issued favorable rulings on March 10, 2014, related to certain tax issues associated with potential amendments to the rehabilitation plan for the Segregated Account (the "Rehabilitation Plan"). Accordingly, Ambac expects the Wisconsin Commissioner of Insurance, acting in his capacity as rehabilitator of the Segregated Account, to pursue the implementation of amendments to the Rehabilitation Plan whereby instead of surplus notes being issued with respect to the unpaid balance of permitted policy claims, as provided for in the current Rehabilitation Plan, such balances would continue to be recorded by the Segregated Account as outstanding policy obligations which would accrue interest from the first date on which a portion of such permitted policy claim is (or was) paid until such outstanding policy obligations are paid in full. Such amendments will likely provide that interest on the unpaid portion of permitted policy claims be accrued generally at an effective rate of 5.1%, compounded annually. Such amendments to the Rehabilitation Plan will require the approval of the Circuit Court for Dane County, Wisconsin, which is overseeing the Segregated Account rehabilitation proceedings. The timing and likelihood of such amendments to the Rehabilitation Plan are presently unclear.

    SubjectQuestion
    Entry03/19/2014 10:31 AM
    Memberwrt233

    Why is it that the company’s auditors allow Ambac to keep such high RMBS reserves if they are inflated?   Isn’t the auditor responsible for questioning management and testing carrying levels on these positions?


    SubjectBAC litigation
    Entry04/16/2014 10:09 AM
    MemberBox
    BAC added $2.4B of reserves for mortgage related litigation expense . It looks like the Ambac claims are the only remaining major mortgage related litigation for BAC. Is $2.4B the total amount BAC has reserved for the Ambac claims? Or had they previously reserved a lesser amount and the $2.4B is in addition?
     
    Thanks.

    SubjectRE: RE: BAC litigation
    Entry04/16/2014 01:53 PM
    Memberpathbska
    MIP - can you provide your assumptions for the 6 cases that AMBAC has o/s - i.e. how much you expect AMBC to collect and why? 
     
    BAC indicated on its call that the incremental $2.4 B reserve was for other non-FG related mortgage issues. 

    SubjectRE: RE: RE: FGIC settlement
    Entry04/17/2014 10:11 AM
    Memberpathbska
    How do you handle the non-controlling interest in your calculation of adjusted Book value? Where do you get the - $498.4 that you start with. When I account for the noncontrolling interest, I start at ($621 MM). Thanks again. 

    SubjectRE: amendments to rehabilitation plan
    Entry04/21/2014 08:10 PM
    Membercreditguy
    do you view today's news as positive, negative, or netural for equity?  while claimants are receiving a greater percentage of their claim in cash (which could be viewed as negative for equity) perhaps the news foreshadows the imminent receipt of rep and warranty proceeds?  otherwise, why would rehabilitator change the plan at this late point? net/net today's news struck me as a positive but I wondered how others are likely to view this news.
     
    anyone care to share their thoughts?

    Subjectpuerto rico
    Entry07/03/2014 02:02 PM
    Membercreditguy
    Mip14,Does ambac deserve to be down significantly on worsening news out of or given no exposure to prepa and manageable exposure to prhta?  Any new thoughts re likely timing of jpm and bofa, respective, litigation?

    Subjectlooks like it found a level...
    Entry07/11/2014 02:27 PM
    MemberCries
    and I find it quite interesting that it is $23, which also happens to be the headline price on this writeup. Coincidence? lol
     
     

    SubjectRE: RE: Investor Day Update / Response to Qs
    Entry07/23/2014 01:22 PM
    MemberLuckyDog
    mip14 - 
     
    Some additional questions for you.  
     
    Assuming ~4bn of R&W proceeds go into the segregated account, would the ~$4bn proceeds just stay in the Segregated account and begin paying down the Segregated Account obligations immediately before paying the General account obligations only after the SA has been fully satisfied?  I have the following items:
     
    Accrued Interest on DPOs
    DPOs (Segregated Account)
    Accrued Interest on Surplus Notes
    5.1% senior surplus notes (Segregated Account)
    5.1% junior surplus notes (Segregated Account) - One State Street
    5.1% junior surplus notes (Segregated Account) - Intercompany to HoldCo AFG
    5.1% surplus notes (General Account)
    AMPS (General Account)

    What is the payment waterfall/priority of these items?

     



     
     

    SubjectRE: RE: Investor Day Update / Response to Qs
    Entry07/23/2014 02:31 PM
    Memberdanconia17
    #1, Sorry, yes, i miswrote.  I should have written the General Account rather than HoldCo.
     
    #2 - it will probably remain in place, but with $4B coming into seg account, that would allow for the a large amount of reserves to be released
     
    #3 i dont think so but mip14 will know better than I would.
     
     

    SubjectRE: RE: RE: mip
    Entry08/20/2014 03:30 PM
    Membermpk391
    I believe the $2.5b figure is total damages claimed by Ambac.  Pretty sure BAC has not been explicit regarding what they've reserved for Ambac specifically.
     
     

    SubjectRE: RE: RE: ambc - Recent Stock weakness?
    Entry09/10/2014 11:09 AM
    Membercablebeach
    I have two questions for mip14 and others following this - why do you think this stock has traded so poorly since mid August given that most of PR stuff seems to be getting better (benchmark PR GO 8% of 35 are trading around issue price) - ?  And is there anything besides a positive settlement that can turn the tide on this stock?

    SubjectLack of insider purchases
    Entry10/10/2014 04:51 PM
    MemberHandley
    If the company is worth a large multiple of last sale, why have we seen no insider purchases?  Do we believe they have been under a permanent blackout due to the lawsuits?  If not, doesn't it seem strange that no insider has chosen to make an open market purchase?

    SubjectRE: RE: lack of news
    Entry10/14/2014 02:59 PM
    Memberspike945
    danconia - if they settle for 2b where do you think the stock ends up trading? 
     
    it would be interesting to come up with an implied settlement value at today's 20 dollar stock price. 

    SubjectRE: RE: RE: RE: lack of news
    Entry10/14/2014 04:03 PM
    Memberspike945
    the work on the thread is wonderful.  i just am not sure the "market" will give them dollar for dollar credit.
     
    i suspect BAC wants to clean this up.  maybe the give us all a surprise soon with a settlement.  i could see 1.5B-2.0B.  i think the stock trades up but not to book value.
     
    thanks for the comments and the discussion.

    SubjectRE: RE: RE: RE: lack of news
    Entry10/14/2014 04:06 PM
    Membersocratesplus
    @danconia
     
    i think the $1B is what BAC has reserved as per 10Q at 6/30/14.  i am not aware that anyone knows what AMBC has booked as a subrogation receivable.
     
    if i am wrong please correct me.

    SubjectRE: RE: RE: RE: RE: RE: lack of news
    Entry10/14/2014 04:38 PM
    Memberspike945
    agreed that they can hide these things in several places.
     
    what Ambac has going for it is that i assume that BAC wants to clean this up sooner rather than later.  so it won't be a surprise if we see a settlement in the next few quarters.

    SubjectRE: RE: MKM downgrade to $15?
    Entry10/28/2014 11:21 AM
    Memberspike945
    any chance the BAC lawsuit goes to trial? 
     
    i have assumed not a chance but i am surprised a settlement hasn't happened.
     
     

    SubjectRe: Re: Re: Executive Changes Announced
    Entry12/23/2014 08:51 PM
    Membersocratesplus

    I imagine ambc was a losing bidder to AGO on radian fig buy. Maybe sour grapes


    SubjectNew Filed Claims in NY, filed yesterday
    Entry12/31/2014 01:06 PM
    MemberCries

    Here's the filing

    https://dl.dropboxusercontent.com/u/33810173/ambc1.pdf


    SubjectRe: Re: Re: Ambac Significant Update
    Entry01/02/2015 12:37 PM
    Memberspike945

    much appreciated for the update.

     

    in your view does this mean that a settlement isn't near and this is going to go to trial?


    SubjectRe: Re: Re: Re: Re: Ambac Significant Update
    Entry01/02/2015 07:44 PM
    Membersocratesplus

    mip14, you say "and Ambac (unlike MBIA) is litigating from a position of strength".  i take it that you mean financial strength; i would agree (relatively speaking).

    have experts' reports been filed that indicate the amount of paid claims as of a recent date on the original suit against bac? thx in advance.

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Ambac Significant Update
    Entry01/04/2015 04:31 PM
    Membersocratesplus

    thanks for reply mip.  i guess i am waiting for ambc's motion for summary judgment before i pull the trigger.  knowing bac's MO, i think it unlikely it will settle before then


    SubjectRe: Another Case Against Countrywide
    Entry01/13/2015 12:22 PM
    Membersocratesplus

    thanks mip. filed just before the statute of limitations tolling agreement expired. if there is to be a global settlement negotiated between bac and ambc, at least we know now what ambc's chip pile looks like.


    Subject? 4 U mip14
    Entry01/23/2015 12:10 PM
    Membersocratesplus

    i was reading the 1st D's affirmance of ramos's dismissal of contract claims in EMC (http://www.nycourts.gov/reporter/3dseries/2014/2014_07064.htm) and the opinion noted that ambc argued in briefs that if the 3PB claim could not be asserted directly by ambc, it would be left without a rememdy, at which point the court essentially said sorry charlie.

    but that doesn't sound right. i would think ambc could go to the respective trustees with a list of defective loans and tell them to exercise putbacks (subject to whatever defenses EMC could assert) on ambc's behalf. 

    do you know if ambc is doing that re EMC? i was going to call ambc IR and ask if it was and if not why not, but i would appreciate knowing whether you have been down that route with them first, or otherwise had color on the question.  thx in advance


    SubjectRe: Re: Re: ? 4 U mip14
    Entry01/23/2015 05:15 PM
    Membersocratesplus

    everdeen, after doing some digging, you are correct re the first lien securitizations.  recovery that will flow through to ambc likely not significant. there is the fraud cause of action, but that is a tough roe to hoe even with an enviable fact pattern.


    SubjectRe: Ambac R&W Cases Summary
    Entry01/23/2015 05:32 PM
    Membersocratesplus

    good chart mip14. thanks.

    do you think that the $2.5B number that bac referenced in the 10K includes the bottom two fraud cases filed at end of 2014, set forth at bottom of chart?  a careful securities lawyer at bac (not saying there is one) might have sought disclosure of all potential damages to ambc, not just those that might be payable in respect of your Countrywide I.  if so, then you are double counting to tune of $885MM...


    SubjectRe: Re: Re: Ambac R&W Cases Summary
    Entry01/23/2015 05:46 PM
    Membersocratesplus

    thanks for checking mip!


    SubjectRe: any new readthrough on timing BAC settlement?
    Entry02/03/2015 01:30 PM
    Membersocratesplus

    @danconia

    "If I remember correctly, BAC would not want this to go through trial because an unfavorable ruling could open them up to liabilities on prior settlements?  Is that true?"

    i dont think that is true. settlements typically result in dismissals of litigation with prejudice and exchanges of releases 

    with bac, settlement will be later than you expect


    SubjectFraud Jury Verdict in BAC Hustle case affirmed by Rakoff
    Entry02/03/2015 04:01 PM
    Membersocratesplus

    http://www.wsj.com/articles/judge-denies-bank-of-americas-request-for-new-hustle-trial-1422986392?mod=WSJ_hp_LEFTWhatsNewsCollection

    if you look at mip's case summary, message #201, you will notice fraudulent inducement claims.  in normal times not involving extraordinarily bad conduct, one might think that a fraud case has a low probability of success, given the defendant scienter requirement and plaintiff reliance requirement.  but this hustle case might serve as fair warning to BAC that countrywide may be the exception to the general rule.


    SubjectRe: Re: Re: any new readthrough on timing BAC settlement?
    Entry02/04/2015 10:49 AM
    Membersocratesplus

    hey mip

    the last scheduling order that i saw (7th) calls for oral arg on SJ on 6/24. giving j bransten through september to write her opinion and (assuming sj is not gratned) it looks like trial is more likely for late fall/winter 2015.


    SubjectBernstein Conference
    Entry03/11/2015 03:22 PM
    MemberTheEnterprisingInvestor

    Ambac was at the Bernstein conference today.  The presentation is worth a listen:

    http://cc.talkpoint.com/bern001/031115a_ae/?entity=5_5TMFKB3

     


    SubjectRe: Bernstein Conference
    Entry03/11/2015 05:19 PM
    MemberTwoSigma

    Thought it was interesting that Nader mentioned pre-judgement interest. Anyone have thoughts on how much pre-judgement interest they might be owed? He seemed to suggest they would be aggressively pursuing this.


    Subjectlatest legal issue
    Entry04/16/2015 03:39 PM
    Membersocratesplus

    in the large countrywide case is whether countrywide can reduce its damages exposure by the discount amount of wrapped countrywide rmbs ambc purchased.

    countrywide is asking j bransten to order ambc to provide information related to ambc's purchases since the discovery cut off period has long passed. so there is a procedural hurdle for countrywide to overcome, because without the factual information, countrywide cant make its arguement.  countrywide avers in a letter to the court that its damages may be >$500MM less than otherwise if ambc has been deemed to reduce its losses through its open market purchases, so this aint chickenfeed.

    there is a substantive problem, however. while the law requires plaintiffs to mitigate losses in certain events, it is by no means clear that this is one of them, and it is very uncertain that countrywide should derive any benefit from any loss avoidance activity on ambc's part.

    there is no statutory law, only general common law on this.  an example is where x has agreed to supply a part to y for $100, and y uses that part to build a machine which it sells to z for a $1000 profit. if x fails to deliver, y can't sit on its thumbs and sue x for $1000 if y can find a replacement part, and if that replacement part costs $200, then y can sue x for the $100 difference ($200 it paid v $100 it had agreed to pay).

    but this general loss mitigation rule deals with the obligation of a plaintiff to obtain replacement performance, and only where available on commercial terms.  this is a very different situation from ambc's going into the market and buying discounted bonds. the transaction is which countrywide allegedly failed to perform (selling r/w conforming mortgages) has long past and one would think countrywide would only have a plausible argument if ambc had remedies that it could pursue to replace those mortgages (such as through putbacks).  

    subsequent open market bond purchases by ambc years after the mortgage transactions in which ambc engages in its own principal risk taking would seem to be too remote for countrywide to claim any benefit for itself.


    SubjectRe: mip any update?
    Entry06/02/2015 01:44 PM
    Memberdanconia17

    looks like AMBC filed "jury trial readiness" document may 29th.  summary judgment july 15th.  I guess this could go to trial, but if the judge finds overwhelmingly in AMBC favor, the pressure to settle will mount.  timing??


    SubjectRe: latest legal issue
    Entry06/05/2015 08:51 PM
    MemberTheEnterprisingInvestor

    Looks like the loss mitigation info request was denied.

    https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=Ws2/4_PLUS_Gh6V7lMDhgGuZSAw==&system=prod


    SubjectRe: Re: Re: Mip
    Entry06/14/2015 07:31 PM
    Membercfavenger

    Summary judgment usually comes right before a trial in which the judge is asked to skip trial on certain claims and issue judgment "as a matter of law.". For this to occur there can't be any material facts in dispute which would sway the outcome. In other words, party A says "even if everything party B says is factually true, they still lose because the law is on my side" (thus compressing a semester of Civil Procedure with some admitted loss of fidelity but not much).  It's pretty much assumed that pretrial both parties will unleash summary judgment motions on everything they can think of due to the legal principle of "Why the hell not," or, in finance speak, "free option." After all, it's summertime and even if you are totally wrong as a matter of law there is always the chance the judge has handed this to a 1L summer intern who won't know that. Having once been the said intern I can attest it is not a terrible strategy. 


    SubjectRe: Re: Re: Mip
    Entry06/14/2015 08:02 PM
    Membersocratesplus

    @bafana

    to answer your question, no.

    bransten declined to grant summary judgment against BAC in very similar suit brought by MBI.  she ruled in a very favorable manner on the law, but thought some fact finding was still needed...this, on a very strong showing by MBI at the summary judgement stage.

    so, SJ is not a winning bet. 


    SubjectRe: Re: Re: PR
    Entry06/30/2015 03:36 PM
    Memberladera838

    Thank you Shooter.

    Mip, et al ... any thoughts about the current situation?  

    Thanks in advance.


    SubjectRe: Re: RE: PR
    Entry07/01/2015 09:05 PM
    MemberTheEnterprisingInvestor

    Thanks for the thoughts, I tend to agree with danconia and worry about the point Socrates made.  Any thoughts on how this situation might weigh on settlement talks?  I'd think not heavily, but if BoA thinks they may be under duress it can't help, but it may help them commute some more policies or buy in some ambc wrapped rmbs or student loan policies.

     


    SubjectRe: Re: Re: Re: Updates?
    Entry10/27/2015 05:13 PM
    MemberTheEnterprisingInvestor

    Any thoughts on the SJ docs filed today? 

     


    SubjectCancellation of $228.5m of HTA net par
    Entry11/09/2015 09:06 PM
    MemberTwoSigma

    Can someone explain to me what happened here?

    ---

    Mr. Tavakoli continued, "Nevertheless, our guarantees of various obligations of entities affiliated with Puerto Rico continue to be an overhang. We are devoting substantial resources to protecting our interests and will be zealous in enforcing our contractual and legal rights. To this end, working with the Puerto Rico Highways and Transportation Authority ("HTA"), we expect to achieve shortly the cancellation of $228.5 million net par (equating to approximately $493 million of aggregate lifetime net principal and interest) of our insured HTA bonds, eliminating this risk from our insured portfolio. We want to stress again that there is no possibility that our policies can be accelerated under any default scenario except at the sole option of Ambac Assurance.


    SubjectRe: Cancellation of $228.5m of HTA net par
    Entry11/09/2015 10:16 PM
    MemberTheEnterprisingInvestor

    I'm not sure, I think we'll learn more on the call tomorrow, but this is from the 10q:

       
    (2)
    Includes $2,392 and $2,437 of Puerto Rico net par outstanding at September 30, 2015 and December 31, 2014 , respectively. These amounts include $229 of Puerto Rico Highways and Transportation Authority bonds that were repurchased by the issuer and are expected to be cancelled. Components of Puerto Rico net par outstanding includes capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy.
     
     

     


    SubjectRe: Re: Cancellation of $228.5m of HTA net par
    Entry11/10/2015 09:08 AM
    MemberTheEnterprisingInvestor

    It sounds like they "discovered" that PR bought this in and enforced their right to cancel the guarantee at no cost.  

    Lot of other interesting developments, lots of questions/comments on Nader staying on, I hope he does.  Sounds like they're doing a good job on the things they have some influence over.  


    SubjectRe: Jpm settled
    Entry01/26/2016 12:15 PM
    Membersocratesplus

    i had pencilled in a range of $400-600MM for JPM, so this is an exceptional settlement.  it also raises expectations for settlement with BAC, which may make that settlement harder to achieve.


    SubjectRe: Re: Still Follow?
    Entry12/19/2016 03:39 PM
    Membersocratesplus

    thanks shooter. pretty weak analysis by fong (mkm) imo. compares to syncf, which is not appropriate (at least without a lot more support/analysis than he gave). i have talked to fong and he is very conservative.

    i think ambc has been working the litigation recovery program very well, though resolution has been slow.  as rates go up, investment income should go up.  but my hesitation with monolines is that if a muni can get into ch. 9, the judge will prefer pensioners to unsecured funded debtholders, and pension underfunding is the silent cancer across america. 

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