S&P rates the FSA baby bonds as A+, but the yield on all of them is currently from 10.4% to 10.6% and therefore clearly in the junk bond category. However, S&P gives the GMAC baby bonds, such as GOM, a CCC rating or only one level above the worst possible rating a bond can get. Its yield is currently 10.4% or virtually the same as the FSA bonds.
_will go bankrupt in less than 5 years._
You are gifted with a crystal ball that lets you see clearly the demise( or near demise) of the biggest auto company that reportedly received $60 bn of US govt money!
The GM baby bonds were not junior debt, but senior unsecured debt. The bond holders were screwed by the Auto Task Force and by Larry Summers who was Obama's counselor. This was the most flagrant act of discrimination among unsecured bond holders in my lifetime. The UAW was given special treatment rather than equal treatment. Moral of story: don't buy bonds in any company whose workforce is unionized.
Ambac will definitively have to do a debt/equity exchange or Ch. 11 at the holding company in 2011.
Why? Because the only conceivable way they could avoid this would be an extraordinary dividend from Dilweg -- something I don't even think HE would allow, and he has been exceedingly generous.
Even if Ambac is not in conservatorship by Q4 10, and even assuming they magically (and really unimaginably) do not post a statutory loss for the year, they are limited to upstreaming 10% of statutory surplus. That was, at 6/30/09, ~$300 mm. $30 mm is not enough to cover interest & operating expenses at HoldCo
They are trying right now to petition the BMA to allow them to transfer like $34 mm from Ambac Bermuda (I didn't know it existed) to HoldCo -- this would be incrementally positive. This is all from 10-Q
For Ambac, assuming they survive that long (I think they will post a deficit by year end, but Dilweg will let them stay out of conservatorship regardless) they will have to:
i) do a debt/equity exchange (extremely hard to imagine this succeeding -- look at HoldCo debt relative to negative shareholder equity -- and the fact that Ambac still even in this scenario could not pay operating expenses/residual debt service)
ii) ch. 11
iii) raise funds in the market, obviously would have to be common stock and this is unlikely barring a marked upturn in prospects.
hope all are well.
You've raised an excellent question, but it would be only speculation on my part regarding Ambac's ability to pay the coupons and the maturing bonds in 2011. Perhaps Ambac's only hope is to succeed in the courts against the many investment banks that knew of or were a party to fraud that nullified these agreements. Before it's all over I believe Ambac will not pay certain claims. MBIA, for example, has already stated that some of its losses will not be realized after its own audit of many sub prime mortgages. Another unresolved matter is to what extent will the rating companies be held accountable in these claims. The court has already ruled that they can not hide behind the argument that were only expressing an opinion as allowed under the Constitution.
_ It's difficult to say how long they can keep paying their interest payments, but it could be several years...........The stockholders may get nothing, but their might still be some value left for the senior unsecured debt holders._
Tony, it is my subjective impression (not based on any data) that there is some value for the senior bonds.
As for the coupons, Ambac has funds at the Holding company level sufficient to pay the coupons for only 4-5 quarters.
And Ambac has about 100 millions of bonds maturing in 2011.
Do you have any thoughts about how Ambac may resolve those two issues: keep paying coupons after 2010 and bonds maturing in 2011 ?
Tony, I see, all the power to ya! I bought them in the mis-teens thinking the initial their problems would blow over, but after getting a couple payments realized there's a LOT more at risk on than just muni bond guarantees.
At $5 you could maybe get your $$ back; but with the markets the way they were, I decided I could take what there was and redeploy somewhere else. The stock price of Ambac tells me all I need to know. Did not fare as well with GM's subordinated debt, but sold most of it too. With AGO and W. Ross, the odds looked dramatically better-- stayin' tuned.
I still own AKF and AKT and have losses on them. I've decided to keep holding them for now. I don't expect Ambac to get out of its troubles easily, but they could hang on for several more years if commutations continue to occur. It's difficult to say how long they can keep paying their interest payments, but it could be several years. They also have a large book of muni wraps that have value and could be sold like FGIC did this year. The stockholders may get nothing, but their might still be some value left for the senior unsecured debt holders.