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June 9, 2010 6:05 PM

Closer to an Ambac Bankruptcy

Posted by Zach Lowe

We appear to be moving to a full-fledged bankruptcy for Ambac Financial Group, as the giant insurer, represented by Dewey & LeBoeuf, revealed in a regulatory filing this week that it may default on some debt payments as early as this year, according to this nice wrap-up from Reuters

We gave you the lay of the land on the Ambac restructuring in March: Dewey has landed what promises to be a lucrative role as Ambac's restructuring counsel, and two sources familiar with the matter say Dewey will stay on in the event that Ambac files for bankruptcy--a move Ambac admitted is possible in a regulatory filing this week, Reuters says. Morrison & Foerster has stepped in as counsel to a group of Ambac bondholders who have united and appear to be pushing for a prepackaged bankruptcy, according to Reuters. Such a deal, which requires the approval of a majority of creditors in advance of any Chapter 11 filing, would result in bondholders swapping debt for equity in the reorganized company. Shareholders would, as usual, be wiped out.

One interesting nugget here: Insurance regulators in Wisconsin have already seized about $64 billion of Ambac's worst assets and liabilities and placed them in a special state court that acts like a bankruptcy court for creditors, according to our prior reporting. Foley & Lardner is advising Wisconsin regulators, who are trying to work out a repayment plan for creditors linked to those bad assets. Foley partner Kevin Fitzgerald did not return a message seeking comment today. 

Davis Polk & Wardwell represents a group of banks to which Ambac owed about $16.5 billion in insurance payments linked to collateralized debt obligations, according to a source familiar with the matter. Those underlying assets went bust, leaving Ambac with a huge bill it likely never expected, Bloomberg reports. The banks, represented by Davis Polk's Donald Bernstein, agreed earlier this week to tear up those $16.5 billion in obligations in exchange for $2.6 billion in cash and about $2 billion in notes that mature in 2020, Bloomberg says. 

Kramer Levin Naftalis & Frankel and Bingham McCutchen represent various other groups of bondholders or other potential Ambac creditors. Lawyers at those firms (and Dewey) declined to comment today. 

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