Bloomberg News

Ambac Wins Approval of Reorganization, Nears Tax Resolution

October 05, 2011

(Updates with lawyer comment in fourth paragraph.)

Oct. 5 (Bloomberg) -- Ambac Financial Group Inc., the bankrupt holding company for a failed bond insurer, won court approval of a plan to restructure more than $1.25 billion in senior notes as a lawyer said the company is close to resolving a key tax dispute.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan court today approved the so-called disclosure statement, paving the way for creditors to vote on a final Chapter 11 plan. She overruled objections from shareholders who said the plan will improperly give them nothing for their investments.

Separately, Peter Ivanic, a lawyer for Ambac, said the company is close to resolving its dispute with the IRS over a tax benefit, and would sit down with mediators next week if there’s still a difference between the “bid and the ask” on a settlement.

“This is the largest, one of the most complex and complicated cases I’ve been involved in,” said Ivanic, congratulating creditors’ lawyer Anthony Princi for helping negotiate key terms, such as resolution of a New York City tax dispute.

Ambac filed a revised plan last month after reaching an agreement with a Wisconsin regulator that resolved how Ambac Financial will share a tax benefit with its operating unit, Ambac Assurance Corp., staving off liquidation of the holding company or litigation with the regulator.

Unsecured Debt

There is $1.6 billion in unsecured debt that would need to be fully repaid before shareholders are entitled to anything, Ambac said in court papers. Ambac’s financial advisers have determined that the value of Ambac Assurance is negative given liabilities of over $2 billion, and future recovery for creditors, who come in line before shareholders, is “uncertain,” lawyers for Ambac wrote.

Ambac Assurance 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, which relied on dividends from the operating unit, filed for bankruptcy in November 2010, about two years after Ambac Assurance stopped selling new policies in 2008.

IRS Dispute

Ambac Financial has yet to resolve a dispute with the Internal Revenue Service over a tax benefit. The IRS has questioned how Ambac Financial used $7.3 billion in net operating losses, or NOLs, to account for its losses from credit default swaps. The agency seeks an $807.2 million claim, which Ambac said should be valued at zero, and a lawsuit over the dispute is still in mediation.

Ambac’s plan values the reorganized company at $750 million. According to a mediation agreement with the Wisconsin regulator, Ambac Assurance will get $3.8 billion in NOLs, or less, depending on certain conditions.

Secured claims will be repaid in full and general unsecured claims will get an 8.5 percent to 13.2 percent recovery, according to the disclosure statement, which sets the reorganization’s terms. Senior notes would get an 11.4 percent to 17.6 percent recovery. The plan still requires court approval, and Ambac seeks a hearing Dec. 8 to have it confirmed.

The plan proposes giving new stock and warrants to Ambac Financial’s general unsecured creditors and holders of $1.25 billion in notes. If those note holders accept the plan, holders of $444.2 million in subordinated notes would get 1.5 percent of the stock plus warrants.

Ambac Financial listed liabilities of $1.68 billion in its initial Chapter 11 petition.

The holding company case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--Editors: Stephen Farr, John Pickering

To contact the reporters on this story: Tiffany Kary in New York at;

To contact the editors responsible for this story: John Pickering at;

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