Author Topic: AMBC - Ambac Assurance Corp  (Read 27511 times)

JRH

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AMBC - Ambac Assurance Corp
« on: May 24, 2013, 01:17:49 PM »
Muni Insurer, fresh out of bankruptcy. 

Very good summary:

http://reminiscencesofastockblogger.com/2013/05/18/the-hidden-values-of-ambac-ambc/

Links to Herzeca's blog post on the potential for Ambac to follow MBIA's litigation template on putbacks:

http://mbibaclitigtion.blogspot.ca/2013/05/summing-up-and-what-next.html

BTIG report:

http://www.scribd.com/doc/141956633/BTIG-Ambac-Financial-Group-Initiation-5-16-13

Lots of chatter on Twitter ($ambc) on some useful details as well (i.e. warrants).
Twitter: @D3302


JRH

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Re: AMBC - Ambac Assurance Corp
« Reply #1 on: May 24, 2013, 01:19:22 PM »
Twitter: @D3302

BargainValueHunter

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Re: AMBC - Ambac Assurance Corp
« Reply #2 on: May 24, 2013, 01:29:25 PM »
What are the terms of the warrants?

Is there an advantage in holding the warrants vs. the common?


Albert Einstein called compound interest "the greatest mathematical discovery of all time".

PlanMaestro

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Re: AMBC - Ambac Assurance Corp
« Reply #3 on: May 24, 2013, 01:47:04 PM »
I was wondering why no one had started a thread. The warrants are non-Tarp: no dividend adjustments and in general the dilution protections look weak. Seem expensive to me with an intrinsic vol in the 40s.

However, considering that the warrants expire in 2023 a lot depends on how cheap is the underlying. I've not seen a good valuation and worst case, most probably because no one really understands it yet.
« Last Edit: May 24, 2013, 01:50:48 PM by PlanMaestro »

no_free_lunch

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Re: AMBC - Ambac Assurance Corp
« Reply #4 on: May 24, 2013, 05:59:52 PM »
A few things, just my simple attempt to answer some comments earlier in the thread.

The EPS for the last quarter were based on the old share count, there are now only 45M shares after the re-org.  Based on that share count the EPS last quarter would have been $6 and change.   I wouldn't expect that type of earnings on a long-term basis as there were negative loan losses and gain on assets.  The blog link posted at the start of the thread has a better interpretation of more normal earnings, $2 / quarter in a low loan loss environment seems reasonable to me.  That amount will trail off over the next decade if they don't write new business.

Regarding the warrants, see propsectus here.  It is a bit weak compared to the tarp warrants but it sounds like it would cover spinoffs at least.

http://www.sec.gov/Archives/edgar/data/874501/000114420413025536/v343212_8a12b.htm

Quote
(i) In case the Registrant shall (A) declare a dividend on its Shares payable in Shares or securities convertible, exercisable or exchangeable into Shares, (B) subdivide the outstanding Shares, whether by way of stock dividend, stock split or otherwise, (C) combine the outstanding Shares into a smaller number of shares, whether by way of stock combination, reverse stock split or otherwise, or (D) issue any shares of its capital stock in a reclassification of, or similar transaction relating to, the Shares (including any such reclassification in connection with a consolidation or merger in which the Registrant is the continuing corporation), the number of Shares acquirable upon exercise of the Warrants on such date shall be proportionately adjusted so that the holder of any Warrant exercised after such action shall be entitled to receive the aggregate number of Shares which, if such Warrant had been exercised immediately prior to such action (or, in the case of a dividend, immediately prior to the record date therefor) and at a time when the common stock transfer books of the Registrant were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such action. In any such event enumerated in clauses (A) to (D) above, the exercise price of the Warrants shall be adjusted to equal (A) the exercise price immediately prior to such adjustment multiplied by the number of Shares for which a Warrant is exercisable immediately prior to such adjustment divided by (B) the number of Shares for which a Warrant is exercisable immediately after such adjustment.

Regarding the valuation, maybe this is a simple way to view it:

After fresh start, the company has $0.4B equity.  $2.3B is a true-up to match to fair value so we should just ignore that for now as it's mostly assuming recovery of loan losses.   With that removed you have -$1.9B book.

Loan loss reserves of $6.5B at 60% recovery rate would give you $3.9B increase to book.  I have no idea if this is a reasonable recovery estimate but I believe it was suggested on the blog and by a previous board poster.  That would set the book at $2B.

There is $5.2 B Net Operating Losses oustanding by my count.  If the business can clean up it's finances , remain profitable and engage in new business wouldn't those be added back to book?   At 35% tax rate that's an additional $1.8B.  Admittedly it would take years for these losses to be added back to book.  In this rosy scenario that pushes your book back to $3.8B.

You also have the $2.6B in premiums receivable.  At the very least, this should keep the lights on until the finances are shored up.  In a low loan-loss environment they could actually add considerable dollars to the book.

Finally, there is the possibility of new business at some point.

Downside is pretty simple, $0 per share and $0 per warrant.  This above all else is why I am going with the warrants, given the risk I am taking I need that higher leverage rate if the stock goes up.  True, I will eat the financing on the warrants if the share price surges but that seems like a good problem to have.

BargainValueHunter

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Re: AMBC - Ambac Assurance Corp
« Reply #5 on: May 24, 2013, 06:13:36 PM »
A few things, just my simple attempt to answer some comments earlier in the thread.

The EPS for the last quarter were based on the old share count, there are now only 45M shares after the re-org.  Based on that share count the EPS last quarter would have been $6 and change.   I wouldn't expect that type of earnings on a long-term basis as there were negative loan losses and gain on assets.  The blog link posted at the start of the thread has a better interpretation of more normal earnings, $2 / quarter in a low loan loss environment seems reasonable to me.  That amount will trail off over the next decade if they don't write new business.

Regarding the warrants, see propsectus here.  It is a bit weak compared to the tarp warrants but it sounds like it would cover spinoffs at least.

http://www.sec.gov/Archives/edgar/data/874501/000114420413025536/v343212_8a12b.htm

Quote
(i) In case the Registrant shall (A) declare a dividend on its Shares payable in Shares or securities convertible, exercisable or exchangeable into Shares, (B) subdivide the outstanding Shares, whether by way of stock dividend, stock split or otherwise, (C) combine the outstanding Shares into a smaller number of shares, whether by way of stock combination, reverse stock split or otherwise, or (D) issue any shares of its capital stock in a reclassification of, or similar transaction relating to, the Shares (including any such reclassification in connection with a consolidation or merger in which the Registrant is the continuing corporation), the number of Shares acquirable upon exercise of the Warrants on such date shall be proportionately adjusted so that the holder of any Warrant exercised after such action shall be entitled to receive the aggregate number of Shares which, if such Warrant had been exercised immediately prior to such action (or, in the case of a dividend, immediately prior to the record date therefor) and at a time when the common stock transfer books of the Registrant were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such action. In any such event enumerated in clauses (A) to (D) above, the exercise price of the Warrants shall be adjusted to equal (A) the exercise price immediately prior to such adjustment multiplied by the number of Shares for which a Warrant is exercisable immediately prior to such adjustment divided by (B) the number of Shares for which a Warrant is exercisable immediately after such adjustment.

Regarding the valuation, maybe this is a simple way to view it:

After fresh start, the company has $0.4B equity.  $2.3B is a true-up to match to fair value so we should just ignore that for now as it's mostly assuming recovery of loan losses.   With that removed you have -$1.9B book.

Loan loss reserves of $6.5B at 60% recovery rate would give you $3.9B increase to book.  I have no idea if this is a reasonable recovery estimate but I believe it was suggested on the blog and by a previous board poster.  That would set the book at $2B.

There is $5.2 B Net Operating Losses oustanding by my count.  If the business can clean up it's finances , remain profitable and engage in new business wouldn't those be added back to book?   At 35% tax rate that's an additional $1.8B.  Admittedly it would take years for these losses to be added back to book.  In this rosy scenario that pushes your book back to $3.8B.

You also have the $2.6B in premiums receivable.  At the very least, this should keep the lights on until the finances are shored up.  In a low loan-loss environment they could actually add considerable dollars to the book.

Finally, there is the possibility of new business at some point.

Downside is pretty simple, $0 per share and $0 per warrant.  This above all else is why I am going with the warrants, given the risk I am taking I need that higher leverage rate if the stock goes up.  True, I will eat the financing on the warrants if the share price surges but that seems like a good problem to have.
 

Informative post. :)

Would it be a bad idea to write covered calls on a half position in the common as a way of justifying holding the other half in warrants (for the leverage) in case of a "best case scenario situation?

« Last Edit: May 24, 2013, 06:15:16 PM by BargainValueHunter »
Albert Einstein called compound interest "the greatest mathematical discovery of all time".

yitech

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Re: AMBC - Ambac Assurance Corp
« Reply #6 on: May 24, 2013, 07:00:25 PM »
The options are very short-term, latest strike is November of this year.  I have no idea how long this thing will take to play out but Novemer just seems too soon.  The options are also very expensive.

Question for anyone here. I saw an item called Insurance intangible, which is around $2.345B. On p.59 of the 10Q, "Insurance intangible: Represents the fair value adjustment for financial guarantee insurance and reinsurance contracts."

It seems like some sort of fair-value adjustment. Do you think it ought to be assigned zero value? Does anyone know what the heck it really is?

no_free_lunch

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Re: AMBC - Ambac Assurance Corp
« Reply #7 on: May 24, 2013, 07:07:25 PM »
For my analysis I removed it.  I couldn't figure out exactly what it is either. However, if you go to page 25 of the 10-Q there is a section where they adjust their balance sheet to fair value.   There are a number of adjustments made but they result in the book being adjusted up (via adjusting liabilities down) by about $2.5B.  To do this, the main item is they adjust the losses down significantly.  I think they are applying the same process but post fresh-start to bring things in line with what they are calling fair value.

Basically, I think if you use the $.4B book from fresh-start then you are already including assumptions of $2-2.5 B to loan loss recovery.  It just seems simpler to take it out.

jay21

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Re: AMBC - Ambac Assurance Corp
« Reply #8 on: May 24, 2013, 07:17:39 PM »
If anyone works with RMBS or knows someone that does,  I'd love to hear if they think going long wrapped RMBS is a better play and/or what their recovery assumptions are for the surplus note.
@jay_21_

hellsten

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Re: AMBC - Ambac Assurance Corp
« Reply #9 on: May 29, 2013, 02:12:03 PM »
Muni Insurer, fresh out of bankruptcy. 

Very good summary:

http://reminiscencesofastockblogger.com/2013/05/18/the-hidden-values-of-ambac-ambc/

Links to Herzeca's blog post on the potential for Ambac to follow MBIA's litigation template on putbacks:

http://mbibaclitigtion.blogspot.ca/2013/05/summing-up-and-what-next.html

BTIG report:

http://www.scribd.com/doc/141956633/BTIG-Ambac-Financial-Group-Initiation-5-16-13

Lots of chatter on Twitter ($ambc) on some useful details as well (i.e. warrants).

Thank you for posting. Ambac is definitely an interesting idea. Who in the world of "professional" money management would have the balls to buy a company that just emerged from bankruptcy and which is not covered by Morningstar or ValueLine :)

From BTIG presentation:
Quote
We estimate AMBCís paid claims to R&W counterparties such as JPMorgan, Bank of America/Countrywide, Credit Suisse, Nomura, and FirstFranklin at $2.5bn. If the company was able to recover 50% of this amount, that $1.258 bn would exceed AMBCís current market capitalization of $1.065bn.

So they might be able to recover $14.3-24.3 per share.

The risks seem low according to BTIG:
Quote
The primary risks to achieving our price target include the possibility that reserves against losses associated with RMBS and other insured instruments may proveinadequate, that fiscal stress of state and local governments could translate into increased losses, and that declines in value of investment portfolio could impede Ambacís ability to pay its liabilities.

Legal details are speculation, but provide much of the potential upside:
Quote
In this recent example, Justice Bransten was right on the law, and Justice Ramos was wrong on the law.  I will cover this example in a future blog post, but this example has particular significance to speculators in Ambac stock, as two of Ambac's largest R&W cases are in front of, you guessed it, Justices Bransten and Ramos.

In future posts in this blog, I will focus on Ambac's cases in particular, as I have a dog in that fight. Ambac is the monoline that has the largest potential fraud and breach of contract damage recoveries remaining among the monolines, and it appears that it may just be catching the wave.
Ö
But as more decisions are handed down, and the legal position of the monolines becomes increasingly secure, it appears that the mbs litigation wave is rolling to shore with increasing amplitude, and Ambac is now in the best position to catch this wave.
Source: http://mbibaclitigtion.blogspot.ca/2013/05/lessons-learned-and-new-blog-title.html

Another interesting document from 2010 has this to say about Ambac vs. MBIA:
Quote
many investors we have spoken with over the years had considered Ambac the more sophisticated of the two companies. We believe the premature failure of Ambac relative to MBIA can be largely attributable to its inability to execute a split of its book of business and failure to raise sufficient additional capital before the markets shut down.
Source: http://www.scribd.com/doc/101757923/Why-MBIA-is-Different-Than-Ambac