Deutsche Bank Securities, Mudrick Capital Management and other noteholders of Ambac Assurance Corp. have filed a lawsuit against the bond insurer, alleging an unauthorised transfer of $65 million to its parent company.
According to Bloomberg, the creditors, which also include CQS and Shenkman Capital Management, filed the lawsuit in New York on March 12. They claim the transfer breached a condition of Ambac’s rehabilitation in Wisconsin, which functions similarly to Chapter 11 bankruptcy for insurers.
The noteholders stated they have not received principal or interest payments on their notes since 2018. The creditors behind the lawsuit hold about 50% of the surplus notes.
Ambac, once the world’s second-largest bond insurer before the 2008 financial crisis, faced significant financial distress following the collapse of the market for collateralised debt obligations linked to the US subprime mortgage sector.
The company entered rehabilitation in 2010 and emerged from the process in 2018. The creditors who initiated the lawsuit hold surplus notes issued to policyholders as part of Ambac’s rehabilitation. They claim that any transfer exceeding $5 million requires approval from Wisconsin’s insurance commissioner under their agreement with the company.
Ambac has previously pursued legal action against underwriters, including Bank of America Corp., accusing them of transferring mortgage-backed securities risks to the insurer.
According to the complaint, Ambac transferred $65 million to its parent company, Ambac Financial Group, to acquire a stake in Beat Capital Partners Ltd.
The creditors argue that although Ambac Assurance had a pre-approval letter from the state insurance commissioner for insurance-related co-investments with its parent company up to $75 million, the transaction was structured as an intercompany loan. They claim this does not qualify as a co-investment and prioritises the interests of Ambac’s shareholders over those of the noteholders.
Spokespeople for Ambac, the Wisconsin Office of the Commissioner of Insurance, Deutsche Bank, Mudrick Capital, and Shenkman Capital declined to comment. A representative for CQS did not respond to a request for comment, according to Bloomberg.
The creditors stated in the lawsuit that Ambac’s counsel described their claims as “based on erroneous and uninformed factual allegations and misleading statements,” and said their characterisation of the Beat Capital investment was “incomplete and inaccurate.”
Ambac’s surplus notes had a current principal balance of $519 million and unpaid interest of $475 million as of the end of 2023, Bloomberg reported, citing a filing with the US Securities and Exchange Commission last year. Since their issuance in 2010, the Wisconsin insurance regulator has only permitted two exceptional payments and has not approved any regular payments, according to the filing.
