(Updates with deadline for settlement in first paragraph.)
July 8 (Bloomberg) -- Ambac Financial Group Inc., the bankrupt holding company for a failed bond insurer, provided details on the potential outcomes of its Chapter 11 case, saying its reorganization rests on reaching a settlement with Wisconsin regulators by July 29.
Ambac could exchange its debt for stock in a new company, or “deconsolidate,” breaking away from its operating unit, depending on whether a settlement is reached, according to a filing today in U.S. Bankruptcy Court in Manhattan. On July 6, Ambac filed a loosely outlined plan, without an agreement with the Office of the Commissioner of Insurance, the Wisconsin regulator overseeing the wind-down of the company’s failed bond insurer, Ambac Assurance Corp.
Since Ambac Financial filed for Chapter 11 protection in November, it has clashed with constituents, including its operating unit, over who gets $7.3 billion in net operating losses to use for tax benefits. The Internal Revenue Service has challenged tax claims by both companies.
“There is a risk that the IRS dispute may (i) not be resolved in the debtor’s favor, (ii) substantially deplete the debtor’s cash, and/or (iii) delay consummation of the plan,” lawyers for Ambac wrote.
Today’s so-called disclosure statement provides details on the two paths the company might go down. It doesn’t estimate what recoveries for unsecured or secured creditors would be.
Net Operating Losses
Under its proposed settlement plan, Ambac Assurance would get $4 billion in net operating losses to offset income for tax purposes. So-called NOLs are valuable because they let taxpayers offset income. The NOLs would be available to the operating unit in exchange for cash payments of $60 million paid when the company exits bankruptcy and on the first through to the fourth anniversary of that date, according to court papers.
The plan estimates an equity value for a reorganized Ambac Financial at $750 million.
New stock and warrants would go to general unsecured creditors and holders of $1.25 billion in notes. If those noteholders accept the plan, holders of $444.2 million in subordinated notes would get 1.5 percent of the stock plus warrants, according to the July 6 filing.
Those terms are only possible if the plan is under way by July 29, Ambac said today.
Under the “deconsolidation” option, Ambac said that it would transfer more than 20 percent of its stock in the operating unit to a limited liability company, named AFG Prime, or another third party, causing the loss of any tax benefit from the NOLs. It would then give the maximum amount of its operating unit’s NOLs for itself, or take a loss from its holding of the operating unit’s stock, to the “maximum extent permitted,” by the tax law and the U.S. Treasury, Ambac said.
Ambac Financial could convert to a Chapter 7 and liquidate if Wisconsin regulators agree to neither option, the company said. In the event of a deconsolidation, it will also direct lawsuits against its operating unit to a trust, and provide “broad releases of the debtor, the reorganized debtor, the board of directors and board committees of the debtor,” and all officers and directors from lawsuits.
Ambac Assurance, an operating unit of New York-based Ambac Financial, was the second-largest bond insurer before the 2008 financial crisis, when mounting defaults on mortgages swamped the company with claims. It guaranteed about $256 billion of $1.4 trillion in insured municipal debt, according to Bloomberg data.
Ambac Financial filed for Chapter 11 bankruptcy in November, listing assets of $90.7 million and liabilities totaling more than $1.6 billion, virtually all unsecured.
The holding company case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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