Ambac Financial Group Inc (AMBC.O), the U.S. bond insurer facing a challenge to its board by hedge fund Canyon Capital Advisors LLC, is vying to acquire smaller peer CIFG Assurance North America Inc, according to people familiar with the matter.
The Commissioner of Insurance of the State of Wisconsin has prevented Ambac from underwriting new business since it emerged from bankruptcy in 2013. An acquisition of CIFG would offer an alternative route for Ambac to boost management fee revenue by increasing its assets.
The potential deal would also be a way for Ambac to turn the tables on an executive put forward by Canyon for election next month to Ambac's board: CIFG Chairman Eugene Davis. Davis may have to recuse himself if he lands a seat on Ambac's board while negotiations with CIFG are ongoing.
CFIG is working with investment bank Houlihan Lokey Inc (HLI.N) to explore a sale, the people said on Monday. CIFG has about $6 billion in assets, the people added.
There is no certainty that Ambac will prevail in the auction for CIFG, the people said. Assured Guaranty Ltd (AGO.N), another monoline insurer, could also show interest in CIFG, some of the people added.
The sources asked not to be identified because the deliberations are confidential. Representatives for CIFG, Ambac, Houlihan Lokey and Assured Guaranty declined to comment.
CIFG's insurance policies back municipal, student loan, infrastructure and other financial instruments. Analysts say a potential buyer could pay close to $400 million to buy CIFG.
Ambac is a shadow of its former self as a result of getting badly roiled in the 2008 financial crisis, and is currently worth just $760 million, down from $1.6 billion two years ago and around $10 billion in 2007.
Canyon, which holds a 4.5 percent stake in Ambac, has been calling on the company to find ways to accelerate the settlement of $4 billion in insurance claims. Last month it put Davis and two other nominees up for election to Ambac's board.
Ambac has called Canyon's proxy contest "a thinly veiled maneuver designed to accelerate payments on its own creditor position." Canyon has some $376 million invested in the claims it is hoping Ambac will buy back or accelerate their payments, subject to approval by the Wisconsin regulator.
Last week, Ambac appointed two new directors to its board, including David Herzog, the retiring CFO of American International Group Inc (AIG.N), and Ian Haft, a partner at Cornwall Capital Management LP.
(This story has been refiled to correct spelling of Assured Guaranty in paragraphs five, six)
(Reporting by Mike Stone in New York; Editing by Frances Kerry)