(Reuters) - Ambac Financial Group Inc has filed an amended bankruptcy plan after reaching a settlement with its Wisconsin regulator, which could avert a liquidation for what was once the second-largest U.S. bond insurer.
The amended reorganization plan, filed Wednesday night with the U.S. bankruptcy court in Manhattan, followed an agreement with Wisconsin’s insurance commissioner to resolve tax and other disputes involving the Ambac Assurance Corp operating unit.
Under a restructuring approved last year by Wisconsin, many of Ambac Assurance’s risky mortgage obligations were moved into a “segregated account.” Ambac ABKFQ.PK said the policies in this account had $40.5 billion of exposure as of June 30.
Ambac previously said failure to win regulatory support from Wisconsin could force it to liquidate, which would render insurance guarantees worthless and cause creditors to recover less.
In a statement, the Wisconsin regulator said its accord with New York-based Ambac “recognizes the advantages of reducing uncertainty and avoiding unnecessary litigation,” and allows it to focus on rehabilitating the segregated account.
Still unresolved is an Ambac dispute with the U.S. Internal Revenue Service over who gets net operating losses, estimated to total $6.8 billion as of June 30, to use for tax benefits.
Ambac said a resolution is “vital” to approval of its bankruptcy plan, and that mediation is continuing.
An IRS spokesman declined to comment.
Ambac filed for Chapter 11 protection from creditors last November, burdened by large losses after it strayed in the prior decade from insuring municipal bonds and began guaranteeing bonds backed by risky mortgages.
MBIA Inc (MBI.N), a larger Armonk, New York-based rival that suffered similar losses but did not go bankrupt, was restructured by New York’s insurance commissioner in 2009.
Nine banks are suing to undo that overhaul, saying it left a structured finance unit undercapitalized and unable to pay out on billions of dollars of their claims.
Under Ambac’s amended bankruptcy plan, holders of secured claims would be paid in full.
Holders of general unsecured claims would recover 8.5 cents to 13.2 cents on the dollar, and holders of $1.25 billion of senior notes would get 11.4 cents to 17.6 cents on the dollar.
These two groups of creditors would get stock and warrants in a reorganized Ambac. If the noteholders accept the plan, then holders of $444.2 million of subordinated notes would get 1.5 percent of the stock, as well as warrants.
The case is In re Ambac Financial Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 10-15973.
Reporting by Jonathan Stempel in New York; Additional reporting by Sakthi Prasad in Bangalore; Editing by Matt Driskill and John Wallace