Significant Deleveraging and
Simplification of Capital Structure Exchange Offer
to be Launched
Ambac Financial Group, Inc. (Nasdaq:AMBC) (“AFG”), a holding
company whose subsidiaries, including Ambac Assurance Corporation
(“AAC” and together with AFG, “Ambac”), provide financial
guarantees, announced today that Ambac has entered into a preferred
stock repurchase and support agreement with holders (the “Holders”)
of AAC’s outstanding Auction Market Preferred Shares
(“AMPS”). Under the terms of the agreement Ambac will
purchase AMPS held by the Holders in exchange for AAC senior
surplus notes and cash and warrants from AFG. Holders of
approximately 89% of the aggregate liquidation preference of
outstanding AMPS have agreed to support and vote in favor of the
Transactions (as defined below) and have also committed to tender
80% of the $660.2 million aggregate liquidation preference of
outstanding AMPS.
Assuming the minimum participation in the tender by supporting
holders of at least 80% of the aggregate liquidation preference of
outstanding AMPS, Ambac will capture a discount of $217 million on
$528.2 million (80% of the total outstanding AMPS), significantly
deleveraging Ambac’s capital structure and providing for enhanced
financial and strategic flexibility going forward in addition to
other significant benefits. In exchange, AAC will deliver $293.2
million in principal and interest outstanding of 5.1% surplus notes
due 2020 (the “Senior Surplus Notes”) and AFG will pay $10.6
million of cash and deliver 788,265 in warrants held in Treasury to
purchase an equivalent number of shares of common stock of AFG at a
strike price of $16.67. Based on an 80% participation level,
the Transactions are expected to reduce Total Ambac Financial
Group, Inc. stockholders' equity (“Book Value”) and Adjusted Book
Value1 by approximately $71.9 million or $1.59 per share. The
AMPS are carried on Ambac’s consolidated balance sheet under
Noncontrolling interest at $264.1 million. The carry value of
the AMPS was established at fair value upon AFG’s exit from
bankruptcy. The impact on Book Value and Adjusted Book Value1
is a result of the value of the Purchases (as defined below)
exceeding the carry value of the AMPS. The amounts described above
will increase proportionally if there is a higher participation in
the Transactions during the exchange offer.
“We are extremely pleased with the execution of today’s
agreement with the majority of AMPS holders,” said Claude LeBlanc,
President and Chief Executive Officer. “While still subject to
regulatory approval, and the satisfaction of other conditions, if
completed this transaction will materially advance our strategic
goals by accelerating the deleveraging and simplification of our
capital structure among other significant benefits.”
Terms of the agreement are as follows:
- For each share of AMPS repurchased with a liquidation
preference of $25,000, each Holder will receive Senior Surplus
Notes with a total outstanding amount (including accrued and unpaid
interest thereon through the date of the agreement) equal to
$13,875 from AAC, and from AFG, $500 in cash from AFG and
approximately 37.31 in warrants (NASDAQ:AMBCW) to purchase an
equivalent number of shares of common stock of AFG at a strike
price of $16.67 (the “Purchases”), and provide a discount to Ambac
of approximately $10,271.
- The Holders agree to approve the purchase, as required by AAC’s
Restated Articles of Incorporation, as amended (the
“Articles”).
- The Holders agree to support and vote in favor of removing from
the Articles the purported right of holders of AMPS to elect AAC
directors in certain circumstances (the “Charter Amendment” and,
together with the Purchases, the “Transactions”) at a special
meeting of AAC’s shareholders.
Consummation of the Transactions is subject to satisfaction or
waiver of a number of conditions precedent, including, among
others:
- Approval by the Wisconsin Office of the Commissioner of
Insurance;
- Receipt of certain tax opinions;
- Participation by holders of an aggregate of at least 80% in
outstanding liquidation preference of AMPS; and
- The affirmative vote of holders of at least two-thirds in
aggregate liquidation preference of AMPS in favor of the
Transactions at the special meeting of AAC’s shareholders.
The agreement terminates if the Purchases have not been
consummated by September 7, 2018.
Under the agreement, Ambac is required to launch an exchange
offer by July 13, 2018 to all holders of AMPS. Ambac expects
to launch such exchange offer as soon as reasonably practicable.
Moelis & Company LLC acted as financial advisor, Debevoise
& Plimpton LLP acted as counsel and Sidley Austin LLP acted as
tax counsel to Ambac with respect to the Transactions. Kramer Levin
Naftalis & Frankel LLP acted as counsel to certain holders of
the AMPS with respect to the Transactions.
In connection with these discussions, AAC entered into a
non-disclosure agreement with the holders pursuant to which AAC
agreed to publicly disclose all material non-public information
provided to the holders (the “Cleansing Materials”) in connection
with the termination of the non-disclosure agreement. Ambac
has filed a Form 8-K with the Securities and Exchange Commission
containing the preferred stock repurchase and support agreement and
has posted the other Cleansing Materials on the Company’s website
at www.ambac.com under the heading “Information for Investors
Concerning Discussions with AMPS Holders.”
This press release is neither an offer to purchase nor a
solicitation of an offer to sell any securities. The
Purchases are being offered only to the Holders pursuant to the
agreement. In addition, this press release is not a proxy
statement or a solicitation of proxies from the holders of AAC’s
AMPS.
Non-GAAP Financial Data
Adjusted Book Value. Adjusted Book Value is
non-GAAP financial measure which is a numerical measure of
financial performance or financial position that excludes (or
includes) amounts that are included in (or excluded from) the most
directly comparable measure calculated and presented in accordance
with GAAP. The most directly comparable GAAP measures is Total
Ambac Financial Group, Inc. stockholders’ equity. We are presenting
this non-GAAP financial measure because it provides greater
transparency and enhanced visibility into the underlying drivers of
our business. Adjusted Book Value is not a substitute for Ambac’s
GAAP reporting, should not be viewed in isolation, may be subject
to change, and may differ from similar reporting provided by other
companies, which may define these non-GAAP measures
differently.
Adjusted Book Value is defined as Total Ambac Financial Group,
Inc. stockholders’ equity as reported under GAAP, adjusted for
after-tax impact of the following:
- Non-credit impairment fair value losses on credit derivatives:
Elimination of the non-credit impairment fair value loss on credit
derivatives, which is the amount in excess of the present value of
the expected estimated economic credit loss. GAAP fair values are
affected by, and in part fluctuate with, changes in market factors
such as interest rates, credit spreads, including Ambac’s CVA that
are not expected to result in an economic gain or loss. These
adjustments allow for all financial guarantee contracts to be
accounted for within Adjusted Book Value consistent with the
provisions of the Financial Services—Insurance Topic of the ASC,
whether or not they are subject to derivative accounting
rules.
- Insurance intangible asset: Elimination of the financial
guarantee insurance intangible asset that arose as a result of
Ambac’s emergence from bankruptcy and the implementation of Fresh
Start reporting. This adjustment ensures that all financial
guarantee contracts are accounted for within Adjusted Book Value
consistent with the provisions of the Financial Services—Insurance
Topic of the ASC.
- Net unearned premiums and fees in excess of expected losses:
Addition of the value of the unearned premium revenue ("UPR") on
financial guarantee contracts, in excess of expected losses, net of
reinsurance. This non-GAAP adjustment presents the economics
of UPR and expected losses for financial guarantee contracts on a
consistent basis. In accordance with GAAP, stockholders’ equity
reflects a reduction for expected losses only to the extent they
exceed UPR. However, when expected losses are less than UPR
for a financial guarantee contract, neither expected losses nor UPR
have an impact on stockholders’ equity. This non-GAAP adjustment
adds UPR in excess of expected losses, net of reinsurance, to
stockholders’ equity for financial guarantee contracts where
expected losses are less than UPR.
- Net unrealized investment (gains) losses in Accumulated Other
Comprehensive Income: Elimination of the unrealized gains and
losses on the Company’s investments that are recorded as a
component of accumulated other comprehensive income (“AOCI”). The
AOCI component of the fair value adjustment on the investment
portfolio may differ from realized gains and losses ultimately
recognized by the Company based on the Company’s investment
strategy. This adjustment only allows for such gains and losses in
Adjusted Book Value when realized.
Ambac has a significant tax NOL that is offset by a full
valuation allowance in the GAAP consolidated financial
statements. As a result of this and other considerations, for
purposes of non-GAAP measures, we utilize a 0% effective tax rate,
which is subject to change in the future.
Adjusted Book Value was $1,430.9 million, or $31.56 per share,
at March 31, 2018.
Pro Forma Financial Information
The following unaudited pro forma calculation of Ambac Financial
Group Inc.’s stockholders equity and Adjusted Book Value below
assumes that the preferred stock repurchase and support agreement
closed on March 31, 2018 with 80% participation of outstanding
AMPS.
|
|
|
|
|
|
|
|
Reported |
Adjustments |
Pro-Forma |
|
|
|
March 31,
2018 |
March 31,
2018 |
March 31,
2018 |
|
($ in
millions, except per share data) |
|
$ Amount |
Per Share |
$ Amount |
Per Share |
$ Amount |
Per Share |
|
Total Ambac Financial Group, Inc. stockholders'
equity |
|
$ |
1,845.1 |
|
$ |
40.70 |
|
$ |
(71.9 |
) |
$ |
(1.59 |
) |
$ |
1,773.2 |
|
$ |
39.12 |
|
|
Adjustments: |
|
|
|
|
|
|
|
|
Non-credit impairment fair value losses on credit derivatives |
|
|
1.0 |
|
|
0.02 |
|
|
- |
|
|
- |
|
|
1.0 |
|
|
0.02 |
|
|
Insurance
intangible asset |
|
|
(833.0 |
) |
|
(18.37 |
) |
|
- |
|
|
- |
|
|
(833.0 |
) |
|
(18.38 |
) |
|
Net
unearned premiums and fees in excess of expected losses |
|
|
570.9 |
|
|
12.59 |
|
|
- |
|
|
- |
|
|
570.9 |
|
|
12.59 |
|
|
Net
unrealized investment (gains) losses in Accumulated Other
Comprehensive Income |
|
|
(153.1 |
) |
|
(3.38 |
) |
|
- |
|
|
- |
|
|
(153.1 |
) |
|
(3.38 |
) |
|
Adjusted book value |
|
$ |
1,430.9 |
|
$ |
31.56 |
|
$ |
(71.9 |
) |
$ |
(1.59 |
) |
$ |
1,359.0 |
|
$ |
29.98 |
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding (in millions) |
|
|
|
45.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
About Ambac
Ambac Financial Group, Inc. ("Ambac"), headquartered in New York
City, is a holding company whose subsidiaries, including its
principal operating subsidiaries, Ambac Assurance Corporation
("AAC"), Everspan Financial Guarantee Corp. and Ambac Assurance UK
Limited ("Ambac UK"), provide financial guarantees to clients in
both the public and private sectors globally. AAC is a
guarantor of public finance and structured finance
obligations. Ambac's common stock trades on the NASDAQ Global
Select Market under the symbol “AMBC”. The Amended and
Restated Certificate of Incorporation of Ambac contains substantial
restrictions on the ability to transfer Ambac’s common stock.
Subject to limited exceptions, any attempted transfer of common
stock shall be prohibited and void to the extent that, as a result
of such transfer (or any series of transfers of which such transfer
is a part), any person or group of persons shall become a holder of
5% or more of Ambac’s common stock or a holder of 5% or more of
Ambac's common stock increases its ownership interest. Ambac
is committed to providing timely and accurate information to the
investing public, consistent with our legal and regulatory
obligations. To that end, we use our website to convey information
about our businesses, including the anticipated release of
quarterly financial results, quarterly financial, statistical and
business-related information, and the posting of updates to the
status of certain residential mortgage backed securities
litigations. For more information, please go to www.ambac.com.
ContactLisa A. KampfManaging Director, Investor
Relations(212) 208-3177lkampf@ambac.com
Forward-Looking Statements
In this press release, statements that may constitute
“forward-looking statements” within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Words such as “estimate,” “project,” “plan,” “believe,”
“anticipate,” “intend,” “planned,” “potential” and similar
expressions, or future or conditional verbs such as “will,”
“should,” “would,” “could,” and “may,” or the negative of those
expressions or verbs, identify forward-looking statements. We
caution readers that these statements are not guarantees of future
performance. Forward-looking statements are not historical
facts but instead represent only our beliefs regarding future
events, which may by their nature be inherently uncertain and some
of which may be outside our control. These statements may
relate to plans and objectives with respect to the future, among
other things which may change. We are alerting you to the
possibility that our actual results may differ, possibly
materially, from the expected objectives or anticipated results
that may be suggested, expressed or implied by these
forward-looking statements. Important factors that could cause our
results to differ, possibly materially, from those indicated in the
forward-looking statements include, among others, those discussed
under “Risk Factors” in our most recent SEC filed quarterly or
annual report.
Any or all of management’s forward-looking statements here or in
other publications may turn out to be incorrect and are based on
management’s current belief or opinions. Ambac’s actual
results may vary materially, and there are no guarantees about the
performance of Ambac’s securities. Among events, risks,
uncertainties or factors that could cause actual results to differ
materially are: (1) the highly speculative nature of Ambac’s common
stock and volatility in the price of Ambac’s common stock; (2)
uncertainty concerning the Company’s ability to achieve value for
holders of its securities, whether from Ambac Assurance Corporation
(“Ambac Assurance”) or from transactions or opportunities apart
from Ambac Assurance; (3) adverse effects on Ambac’s share price
resulting from future offerings of debt or equity securities that
rank senior to Ambac’s common stock; (4) potential of
rehabilitation proceedings against Ambac Assurance; (5) dilution of
current shareholder value or adverse effects on Ambac’s share price
resulting from the issuance of additional shares of common stock;
(6) inadequacy of reserves established for losses and loss expenses
and possibility that changes in loss reserves may result in further
volatility of earnings or financial results; (7) decisions made by
Ambac Assurance's primary insurance regulator for the benefit of
policyholders that may result in material adverse consequences for
holders of the Company’s securities or holders of securities issued
or insured by Ambac Assurance; (8) increased fiscal stress
experienced by issuers of public finance obligations or an
increased incidence of Chapter 9 filings or other restructuring
proceedings by public finance issuers; (9) failure to recover
claims paid on Puerto Rico exposures or incurrence of losses in
amounts higher than expected; (10) the Company’s inability to
realize the expected recoveries included in its financial
statements; (11) changes in Ambac Assurance’s estimated
representation and warranty recoveries or loss reserves over time;
(12) insufficiency or unavailability of collateral to pay
secured obligations; (13) credit risk throughout the Company’s
business, including but not limited to credit risk related to
residential mortgage-backed securities, student loan and other
asset securitizations, public finance obligations and exposures to
reinsurers; (14) credit risks related to large single risks, risk
concentrations and correlated risks; (15) concentration and
essentiality risk in connection with Military Housing insured debt;
(16) the risk that the Company’s risk management policies and
practices do not anticipate certain risks and/or the magnitude of
potential for loss; (17) risks associated with adverse selection as
the Company’s insured portfolio runs off; (18) adverse effects on
operating results or the Company’s financial position resulting
from measures taken to reduce risks in its insured portfolio; (19)
intercompany disputes or disputes with Ambac Assurance’s primary
insurance regulator; (20) our inability to mitigate or remediate
losses, commute or reduce insured exposures or achieve recoveries
or investment objectives, or the failure of any transaction
intended to accomplish one or more of these objectives to deliver
anticipated results; (21) the Company’s substantial indebtedness
could adversely affect its financial condition and operating
flexibility; (22) the Company may not be able to obtain financing
or raise capital on acceptable terms or at all due to its
substantial indebtedness and financial condition; (23) restrictive
covenants in agreements and instruments may impair the Company’s
ability to pursue or achieve its business strategies; (24) loss of
control rights in transactions for which we provide insurance due
to a finding that Ambac Assurance has defaulted, whether due to the
Segregated Account rehabilitation proceedings or otherwise; (25)
the Company’s results of operation may be adversely affected by
events or circumstances that result in the accelerated amortization
of the Company’s insurance intangible asset; (26) adverse tax
consequences or other costs resulting from the Segregated Account
rehabilitation plan, or from the characterization of the Company’s
surplus notes or other obligations as equity; (27) risks attendant
to the change in composition of securities in the Company’s
investment portfolio; (28) changes in tax law; (29) changes in
prevailing interest rates; (30) changes on inter-bank lending rate
reporting practices or the method pursuant to which LIBOR rates are
determined; (31) factors that may influence the amount of
installment premiums paid to the Company, including the Segregated
Account rehabilitation proceedings; (32) default by one or more of
Ambac Assurance's portfolio investments, insured issuers or
counterparties; (33) market risks impacting assets in the Company’s
investment portfolio or the value of our assets posted as
collateral in respect of interest rate swap transactions; (34)
risks relating to determinations of amounts of impairments taken on
investments; (35) the risk of litigation and regulatory inquiries
or investigations, and the risk of adverse outcomes in connection
therewith, which could have a material adverse effect on the
Company’s business, operations, financial position, profitability
or cash flows; (36) actions of stakeholders whose interests are not
aligned with broader interests of the Company's stockholders; (37)
the Company’s inability to realize value from Ambac UK or other
subsidiaries of Ambac Assurance; (38) system security risks; (39)
market spreads and pricing on interest rate derivative insured or
issued by the Company; (40) the risk of volatility in income and
earnings, including volatility due to the application of fair value
accounting; (41) changes in accounting principles or practices that
may impact the Company’s reported financial results; (42)
legislative and regulatory developments, including intervention by
regulatory authorities; (43) the economic impact of “Brexit” may
have an adverse effect on the Company’s insured international
portfolio and the value of its foreign investments, both of which
primarily reside with its subsidiary Ambac UK; (44) operational
risks, including with respect to internal processes, risk and
investment models, systems and employees, and failures in services
or products provided by third parties; (45) the Company’s financial
position that may prompt departures of key employees and may impact
the Company’s ability to attract qualified executives and
employees; (46) implementation of new tax legislation signed into
law on December 22, 2017 (commonly known as the “Tax Cuts and Jobs
Act”) may have unexpected consequences for the Company and the
value of its securities, particularly its common shares; (47)
implementation of the Tax Cuts and Jobs Act may negatively impact
the economic recovery of Puerto Rico, which could result in higher
loss severities or an extended moratorium on debt service owed on
Ambac Assurance-insured bonds of Puerto Rico and its
instrumentalities; (48) implementation of the Tax Cuts and Jobs Act
could have a negative impact on municipal issuers of Ambac-insured
bonds; and (49) other risks and uncertainties that have not been
identified at this time.
Source: Ambac Financial Group
_________________________________1 See Non-GAAP Financial Data
section and Proforma Financial Information section of this press
release for further information.
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