Author Topic: AMBC - Ambac Assurance Corp  (Read 27502 times)

JRH

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Re: AMBC - Ambac Assurance Corp
« Reply #10 on: May 29, 2013, 03:43:24 PM »
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 :)

It is almost certainly underfollowed at the moment, but I couldn't personally convince myself it is undervalued.  My key observations:

- The pro-forma post-bankruptcy balance sheet appears to be more comparable to MBI/AGO "adjusted book value" where future premiums are discounted back to the present (thus highly discount rate-sensitive) and recorded as an asset (I might be answering Yitech's earlier question here).
- The putback receivable on the balance sheet implicitly expects a certain recovery on losses but I couldn't find enough information to understand whether it was conservative, reasonable, or aggressive.  I followed Christian Herzeca's commentary through the MBIA/BAC litigation and think I generally understand his rationale for further litigation wins but unfortunately I don't know how to quantify that back to intrinsic value.

That's really all it took for me to pass.  I'd love for those things to clear up and take a swing, but couldn't do it based on what I know today.
« Last Edit: May 29, 2013, 03:45:39 PM by JRH »
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no_free_lunch

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Re: AMBC - Ambac Assurance Corp
« Reply #11 on: May 29, 2013, 06:35:27 PM »
BTIG has another post on Ambac, this time discussing the new "intangibles" section of the balance sheet.

Quote
Itís actually the net amount of Fresh Start Accounting-related impact on several different line items. These include premium receivables, reinsurance recoverable on paid and unpaid losses, and subrogation recoverable on the asset side of the balance sheet, and unearned premiums, loss and loss expense reserve, and ceded premiums payable on the liability side.

http://www.btigresearch.com/2013/05/28/ambac-financial-what-exactly-is-that-2-35bn-insurance-intangible-on-the-pro-forma-fresh-start-balance-sheet/


yitech

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Re: AMBC - Ambac Assurance Corp
« Reply #12 on: May 29, 2013, 08:07:22 PM »
On P.25, it does fair-value adjustments. VIE Debts are mostly Level 2 while VIE Loans are mostly Level 3(more opaque). Is the VIE Long-term debt non-recourse to the equity holder? I mean if it is recourse only to the VIE Loans, the balance sheet doesn't seem so dangerously levered.
« Last Edit: May 29, 2013, 08:16:14 PM by yitech »

constructive

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Re: AMBC - Ambac Assurance Corp
« Reply #13 on: May 29, 2013, 08:20:31 PM »
The 10K doesn't offer much on the noncontrolling interest:

"Non-controlling interests: The fair value adjustment [from $660M down to $223M] is based on current quotes from market sources."

It seems like the noncontrolling interest is related to VIE ownership/financing [page 11]. In an upside scenario, do you think this liability would be written back up? Maybe older filings have more info.

constructive

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Re: AMBC - Ambac Assurance Corp
« Reply #14 on: May 29, 2013, 08:29:46 PM »
On P.25, it does fair-value adjustments. VIE Debts are mostly Level 2 while VIE Loans are mostly Level 3(more opaque). Is the VIE Long-term debt non-recourse to the equity holder? I mean if it is recourse only to the VIE Loans, the balance sheet doesn't seem so dangerously levered.

Ambacís subsidiaries provided financial guarantees in respect of assets held or debt obligations of special purpose entities, including VIEs. Ambacís primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structure provides certain financial protection to Ambac. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread.
...

We determined that Ambacís subsidiaries generally have the obligation to absorb the VIEís expected losses given that they have issued financial guarantees supporting the liabilities (and in certain cases assets) of a VIE. [Page 10]

yitech

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Re: AMBC - Ambac Assurance Corp
« Reply #15 on: May 29, 2013, 08:42:58 PM »
On P.25, it does fair-value adjustments. VIE Debts are mostly Level 2 while VIE Loans are mostly Level 3(more opaque). Is the VIE Long-term debt non-recourse to the equity holder? I mean if it is recourse only to the VIE Loans, the balance sheet doesn't seem so dangerously levered.

Ambacís subsidiaries provided financial guarantees in respect of assets held or debt obligations of special purpose entities, including VIEs. Ambacís primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structure provides certain financial protection to Ambac. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread.
...

We determined that Ambacís subsidiaries generally have the obligation to absorb the VIEís expected losses given that they have issued financial guarantees supporting the liabilities (and in certain cases assets) of a VIE. [Page 10]

Thanks, constructive!

yitech

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Re: AMBC - Ambac Assurance Corp
« Reply #16 on: May 30, 2013, 05:54:23 AM »
The 10K doesn't offer much on the noncontrolling interest:

"Non-controlling interests: The fair value adjustment [from $660M down to $223M] is based on current quotes from market sources."

It seems like the noncontrolling interest is related to VIE ownership/financing [page 11]. In an upside scenario, do you think this liability would be written back up? Maybe older filings have more info.

"The adoption of SFAS 160 will require Ambac to reclassify $700,000 for non-controlling interests in subsidiaries from liabilities into equity. This is primarily related to the issuance of Ambac Assuranceís perpetual preferred shares in December 2008 under the contingent capital facility described in Note 14." [page 142 '09 10K]

"Due to the dislocation in the auction rate markets and Ambac Assuranceís downgrade below triple-A by Moodyís and S&P, the dividend rate on the auction market preferred has continuously been reset at the maximum rate of one-month LIBOR plus 200 basis points. At December 31, 2008, the $700,000 is recognized as minority interest on the Consolidated Balance Sheets." [page 173 '09 10K]

I think it's more likely that it would be written up in an upside scenario. Otherwise the Fresh-start accounting might include an entry such as Noncontrolling interest subject to compromise.
« Last Edit: May 30, 2013, 06:12:53 AM by yitech »

constructive

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Re: AMBC - Ambac Assurance Corp
« Reply #17 on: May 30, 2013, 08:39:39 AM »
Good find yitech. If the ARPs are really perpetual, I wouldn't necessarily mark them back up because the fair value is pretty low. On the other hand they might not really be perpetual if they're associated with subs that will run off, or if they're legally vulnerable.

I had a thought on NOLs and writing any future business. My approach wouldn't be to assign a dollar value to the NOLs, it would be to place a P/B multiple on the terminal book value estimate. So if you assume they can write new business at 12% ROE including the NOLs, you might assign a 1.2x multiple. Of course any future value should also be discounted back to the present.

constructive

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Re: AMBC - Ambac Assurance Corp
« Reply #18 on: May 30, 2013, 09:05:47 AM »
Is anyone familiar with the preferred? I wonder if they are a more attractive investment than the common.

http://www.otcmarkets.com/stock/ALSC/news?id=61645

ALSC claims that Ambac wrongfully forced conversion of Auction Rate securities to AMBAC preferred, now trading at .21 to .375 of face value.

"Alliance plans to continue its participation in the lawsuit against AMBAC Assurance Corporation alleging that AMBAC Assurance wrongfully converted the original securities purchased by ALSC into AMBAC preferred shares."

BargainValueHunter

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Re: AMBC - Ambac Assurance Corp
« Reply #19 on: August 11, 2013, 09:42:21 AM »
http://finance.yahoo.com/news/analysis-detroit-crisis-may-lift-121029630.html

Quote
Before the crisis, about half of all new municipal bonds had insurance from nine insurers, with nearly 60 percent covered in 2005. Last year, just 3.6 percent were insured, and this year the number is just over 3 percent, Thomson Reuters data shows.

Bond insurers collapsed during the financial crisis after they ventured into mortgage-backed securities in the years before 2007. Ratings agencies slashed their AAA ratings to junk or withdrew them altogether. That meant bond issuers no longer benefited from their coverage.

With insurers failing to make promised payments, their stock tanked and so did their businesses.

Insurers are among the biggest players in Detroit's case, as about 86 percent of the city's $8 billion debt is insured by six companies. But the bulk of losses is expected on only about $530 million of unsecured general obligation bonds, which are payable over the next 22 years.

That makes the hit insurers would take from Detroit manageable, analysts say. At the same time, coming after other municipals bankruptcies such as Jefferson County in Alabama or Stockton and San Bernardino in California, Detroit would help investors see the benefit of bond insurance.
Albert Einstein called compound interest "the greatest mathematical discovery of all time".