Ambac Rehab Plan Approval Comes Before Wisconsin Judge

Wisconsin Insurance Commissioner Sean Dilweg is seeking a state judge’s approval of a plan to “rehabilitate” a $50 billion Ambac Assurance Corp. portfolio of policies to insure bonds and mortgage-backed securities.

Wisconsin Circuit Court Judge William D. Johnston began hearing testimony today at the state courthouse in Darlington. The plan to pay claimants 25 percent in cash and the rest in nine years at 5.1 percent annual interest has drawn objections.

“The goal here is to start paying claims next year,” Dilweg testified. The ability to fulfill the payment plan is dependent upon the continued U.S. economic recovery and the health of the remainder of Ambac Assurance’s business, he said.

The hearing comes as Ambac Financial Group Inc., the New York-based holding company for the Wisconsin insurer, seeks to reorganize in a Chapter 11 bankruptcy filed Nov. 8 in Manhattan. The parent company has $1.68 billion in liabilities.

Ambac Assurance was the second-largest bond insurer before the credit crisis in 2008. In March, Dilweg’s office ordered the carrier to turn over control of its subprime assets to isolate them from the balance of the insurer’s business as defaults accelerated the pace of policy claims, threatening to deplete the company’s reserves.

Payments Halted

Payment of claims on the segregated policies has halted pending approval of the rehabilitation proposal. Johnston is hearing the case at the Lafayette County courthouse in Darlington, about 66 miles southwest of the state’s capital, Madison.

Peter Poillon, a spokesman for Ambac Financial, declined to comment on the hearing or its significance to the companies, referring questions to Dilweg, whose cross-examination continues tomorrow.

The commissioner faces opposition to his plan from policy holders including the Federal Home Loan Mortgage Corp., better known as Freddie Mac, and its government-subsidized sibling, the Federal National Mortgage Association, or Fannie Mae. Dilweg’s plan is also opposed by Bank of America Corp. as a trustee, and a group of five hedge funds, Aurelius Capital Management LP, Fir Tree Inc., King Street Capital LP, Monarch Alternative Capital LP and Stonehill Capital Management LLC.

Calling themselves the RMBS Policyholders, they’ve challenged Dilweg’s plan to rehabilitate the segregated Ambac Assurance portfolio, arguing that it fails to assure claimants they would receive more money if it is approved than if the company is liquidated.

40 Trusts

Hedge fund lawyer David Greenwald said his clients’ funds include about 40 trusts holding more than $1 billion in Ambac-insured securities.

The first witness to testify at the hearing, Dilweg faced questions from Greenwald about the possibility of plan failure.

“What are the chances they’re going to get paid by 2020?” Greenwald asked, referring to class of segregated account policy holders.

A prolonged or double-dip recession could scuttle the plan, while an economic up-tick could accelerate it, the commissioner said. He also said the plan was dependent on the well-being of Ambac Assurance’s non-segregated business.

While the 13,000-policy general account has assets and liabilities, the 700-policy segregated account has only liabilities, he said. Payments will be funded by the general account.

“The health of the general account is the key,” to repayment of the nine-year notes, Dilweg said.

The judge refused to allow Greenwald to pose a hypothetical question as to what would happen to the plan if the remainder of the company required rehabilitation, calling it speculative.

Hedge Fund Appeal

Johnston, who heard more than three hours of preliminary arguments today, rejected the hedge funds objection to his going forward with the hearing while they challenge an earlier ruling by him in a Wisconsin appeals court.

Lawyers for Ambac and Dilweg have demanded attorneys for the mortgage-backed securities insureds provide them and the court with more detailed information about whom they represent.

“The plan effectively subordinates claims of Ambac policy holders which have been allocated to the segregated account to claims of Ambac’s other policyholders, general creditors and shareholders,” the hedge funds said in a Nov. 8 court filing.

Monorail Bondholders

Michael Van Sicklen, an attorney for Dilweg, told the judge today that a settlement in principle had been reached with holders of Ambac-insured revenue bonds issued by the bankrupt Las Vegas Monorail Co.

Van Sicklen called those obligations “the single largest exposure in the segregated account.”

An attorney for the monorail bondholders, Philip Bentley, said during a court-recess interview, that his clients hold more than $500 million in present-value claims against Ambac, which could increase to $1.1 billion over time.

Dilweg spokesman Tom Becker said he couldn’t immediately comment on the value of the monorail bondholders’ accord which, when completed, will require court approval.

The rehabilitation plan is complicated by a U.S. Internal Revenue Service challenge to the company’s accounting on about $7.3 billion in net operating losses that may be its biggest asset. Ambac Financial on Nov. 9 sued the U.S. to try to protect $700 million in tax refunds, a day after seeking protection in Manhattan.

IRS Challenge

Dilweg has said some of that $700 million is needed to pay policyholders and other claimants. In an effort to shield the insurance company’s share of those net operating losses, the insurance department has placed the related liabilities into the segregated account.

Dilweg, in an Oct. 8 phone interview, said his department had started monitoring Ambac Assurance in 2008 during the global financial crisis and that by the end of 2009, the insurer’s “numbers were going upside down.”

The insurer was paying out as much as $150 million a month, without taking in equivalent capital, he said then, adding, “That was unsustainable.”

The case is In re The Rehabilitation of Segregated Account of Ambac Assurance Corp., 2010cv001576, Dane County, Wisconsin, Circuit Court (Madison).

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