This is a really simple idea where I think that there is a 1-up / 1-down risk reward (you can buy the puts for $0.50 and then either make $0.50 or lose $0.50) but that the probabilities are highly skewed in your favor. The puts got materially cheaper today as the stock is way up on what appears to be no news and a lot of daytrading. Here are the fundamentals:
- The company has only $107 million of cash at the holding company and the regulator has told the company that there will be no more approved dividends from the operating company to pay to the holding company
- The company has $89 million of annual interest and about $15-million of annual holding company expenses that need to be paid from the cash at the holding company
- The holding company has a senior bond due August 2011 of about $145 million
- The other assets at the holding company are Rangemark (worth maybe $10 million), the equity of the Bermuda insurer (worth about $30 million), and the equity of Ambac Assurance (the primary financial guarantor. This equity is probably worthless due to the surplus notes that have been issued from AAC to the segregated account that now holds the insurance for the RMBS policies).
- By way of background, the insurance commissioner in Wisconsin (regulator for Ambac Assurance) split Ambac Assurance in two and created a good insurer (AAC) and a bad insurer (segregated account). The bad insurer has reinsurance from the good insurer, so there is effectively no equity value at the good insurer unless all of the claims due to be paid from the bad insurer are met.
- Total holding company value is probably somewhere around $150-million and shrinking (if due only to the public company expenses that need to be incurred every year).
- The company has publicly discussed pursuing a prepack bankruptcy filing
- The company said in their filings that they may choose to stop paying interest on their holding company debt prior to the third quarter
- Morrisson & Foster held a conference call for senior bondholders of the holding company a few weeks ago. Presumably this was to try to form a bondholder's committee
- I think that the chances Ambac can raise money to repay the August 2011 maturity are slim to none due to the large outstanding amount of debt at Ambac's holding company (over $1.2bn) and the limited assets. I also think that the company is aware of this (see their comments mentioned earlier about a prepack and no longer paying interest)
- I think that it is in the best interest of the company to file soon because they need the capital on hand to get through a bankruptcy. I think their ability to get a DIP is very limited due to the paucity of assets at the holding company
- All signs point to a negotiated prepack, in my opinion
So, I think that there is a 75-80% chance that a bondholder's committee is formed and a prepack is filed. Doing so results in a double on your puts and a high positive expected value to this trade.
|Entry||06/03/2010 01:54 PM|
Not that anyone seems to care given the mediocre rating this has achieved, but a careful reading of the OCI's response doc to the RMBS challenge on the Ambac Policy Holder's website reveals that the commissioner (1) has no intention of allowing additional dividends to the holding company (i.e. liquidity problems likely) and (2) will only allow use of NOLs by holdco to offset cancellation of debt income (foreshadowing some sort of prepack or distressed exchange, in my opinion).
|Entry||06/09/2010 11:28 AM|
A 4.8 rating. Oh well.
|Entry||06/09/2010 02:04 PM|
I think a holding company bankruptcy, especially a prepack, is irrelevent. Quick and surgical debt for equity swap. thoughts?
|Entry||07/28/2010 07:46 AM|
I'd love to hear your current thoughts here. Are you still short? Do you like the common short following the recent pop ($1.03 as I type). TIA
|Entry||07/28/2010 09:32 PM|
I can't see any fundamental change to the thesis. As far as I can tell the company's cash at 6/30 should be under $75mm at the holdco. Seems to me like we must be getting close...