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Hedge Funds Seek to Prevent Ambac From Taking Bond-Insurance Unit's Assets

Date: Tuesday, August 31, 2010
Author: Christine Richard and Dakin Campbell, Bloomberg

Hedge funds including King Street Capital LP and Stonehill Capital Management LP filed a motion seeking to prevent Ambac Financial Group Inc. from taking assets out of a bond-insurance unit.

The policyholders filed a motion in the circuit court of Dane County, Wisconsin, to stop Ambac Financial Group from siphoning off dividends from its Ambac Assurance unit or using net operating losses without compensating the subsidiary, according to a statement issued yesterday. The holding company has said it may file for bankruptcy.

“Absolutely no value should be transferred from Ambac Assurance Corp. to its parent Ambac Financial Group while policyholders and creditors of Ambac Assurance Corp. have claims that have not been paid in full,” policyholders said in the statement.

Ambac, the second-largest bond insurer before the onset of the credit crisis, was stripped of its AAA credit ratings in 2008 after a surge in losses on securities backed by mortgages. In March, Wisconsin Insurance Commissioner Sean Dilweg said he was splitting the insurance unit in two to segregate policies on which the bond insurer is expected to pay claims.

The policyholders own more than $1 billion in securities and other instruments insured by Ambac, according to the statement.

Dilweg said he would take over Ambac’s policies on residential mortgage-backed securities and halt some payments, preserving capital to back the policies of municipal bondholders. Claims set for payment to mortgage investors threatened to deplete Ambac’s reserves, Dilweg said.

Bankruptcy Possible

Ambac lost its ability to take dividends from the insurance unit and said it was considering bankruptcy-court protection after the stoppage of payments threatened the holding company’s ability to cover expenses, according to a June 8 filing.

Ambac has already settled with other investors holding insurance against mortgage losses. In June, Ambac said it had torn up its remaining $16.4 billion of obligations tied to collateralized debt obligations backed by subprime mortgages. The bond insurer said it would pay $2.6 billion in cash and $2 billion of newly issued surplus notes to a group of banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc, which had purchased default protection on the CDOs.

Calls after business hours to Peter Poillon, an Ambac spokesman, King Street Capital, and Dilweg’s office weren’t returned.

The case is In the Matter of Rehabilitation of Segregated Account of Ambac Assurance Corp., 10-cv-1576, Circuit Court, Dane County, Wisconsin.

To contact the reporters on this story: Christine Richard in New York at crichard5@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net