Lawsuit filed against Ambac Assurance for unauthorized transfer to parent company

Several financial creditors, including Deutsche Bank Securities, Mudrick Capital Management, CQS, and Shenkman Capital Management, have taken legal action against Ambac Assurance Corp., accusing the bond insurer of making an unauthorized transfer of $65 million to its parent company. The lawsuit was filed in New York, highlighting a breach of conditions set during Ambac’s rehabilitation process in Wisconsin, akin to a Chapter 11 bankruptcy for insurance companies.

These creditors, who have not received principal or interest payments on their notes since 2018, collectively hold around 50% of the surplus notes. Ambac, once a major bond insurer before the 2008 financial crisis, underwent severe financial challenges following the market collapse related to US subprime mortgage-linked collateralized debt obligations.

In 2010, Ambac began a rehabilitation process, concluding in 2018. The creditors involved in the lawsuit own surplus notes issued to policyholders as part of this rehabilitation process and argue that any transfer exceeding $5 million necessitates approval from Wisconsin’s insurance commissioner under their agreement with the company.

Past actions have seen Ambac suing underwriters, including Bank of America Corp., for their transfer of mortgage-backed securities risks to the insurer. The recent lawsuit revolves around a $65 million transfer to Ambac’s parent company, Ambac Financial Group, for a stake acquisition in Beat Capital Partners Ltd.

The dispute arises from the transaction being structured as an intercompany loan rather than an approved co-investment, as per the pre-approval amount of $75 million for such investments. The creditors claim they had a legitimate expectation regarding the use of their funds and that the transaction seemed to favor Ambac’s shareholders over noteholders.

When contacted for comments, representatives for Ambac, the Wisconsin Office of the Commissioner of Insurance, Deutsche Bank, Mudrick Capital, and Shenkman Capital preferred not to respond. Similarly, no response was received from a representative for CQS. Ambac’s legal counsel refuted the claims made by the creditors, calling them erroneous, uninformed, and misleading.

According to prior reports, Ambac’s surplus notes had a principal balance of $519 million and unpaid interest of $475 million by the end of 2023. The Wisconsin insurance regulator had only permitted two exceptional payments and no regular payments since the notes’ issuance in 2010. The ongoing clash between Ambac and its noteholders paints a picture of discord over financial transactions and regulatory approvals concerning the company’s operational and financial decisions.