Ambac vs. Bankruptcy, Days Looking Numbered (ABK)

Ambac Financial Group Inc. (NYSE: ABK) is likely soon to be the latest of the financial implosion stocks unless some magical event occurs outside of the company.  After the financial guaranty company’s earnings report this week, Ambac again made the warning that bankruptcy is likely.  That trump card is becoming only too common by the company.  This begs a question: Can Ambac survive through the end of summer?

The troubled former financial giant signaled that it is in discussions over a pre-packaged bankruptcy deal.  The company also said that it may decide to cease making interest payments on its debt prior to any move.  By stopping interest payments, Ambac falls into default of its debt.  Creditors can then sue to force a bankruptcy or the company can declare bankruptcy protection to renegotiate terms with creditors.

Ambac’s management said in one of its SEC filings that it likely has enough cash and liquidity to continue operations for another year.  The caveat, there are no assurances that Ambac won’t run out of cash.  The most recent balance sheet for JUne 30, 2010 showed roughly $56.7 million in cash and equivalents.  With a net loss of $57.6 million this last quarter, that cash will be eroded rapidly even if it is a fraction of the loss from the same quarter a year earlier.  Ambac also faced lower investment income, and the ‘net income’ may mean more than ‘operating income’ and ‘pro forma income’ due to the state the business is in.  When you are up againstthe ropes, even the charges, write-offs, one-time items, and exceptions matter when it comes to creditors.

The company is still looking to raise new capital.  It is also trying to restructure its existing debt, which would most likely come via a pre-packaged bankruptcy agreement.  Ambac would not be the first to enter into pre-packaged bankruptcy package, but these deals generally involve agreements with creditors up front so that the bankruptcy process lasts for weeks rather than years.

Ambac warned, or telegraphed, that it will file for Chapter 11 bankruptcy protection if it does not reach an agreement with creditors.  Whether a deal is reached with creditors up-front or not, take a wild guess what the value of that common stock under the “ABK” ticker will be under bankruptcy.  Most likely, ZERO.

The company also warned of bankruptcy when Wisconsin’s insurance commissioner ordered its Ambac Assurance unit to set up a separate policy assurance account over its pool of structured finance positions.  Ambac has been warning since late in 2009 that it may have to seek bankruptcy protection.  That was one determination we had when we listed it as a brand that will disappear.  The operations, the limited resources under the company, the hold by senior creditors, and even the NYSE delisting notices played the rest.

It almost seems inevitable that Ambac will fall into bankruptcy.  New financiers will only come in if they are already creditors to secures them a higher spot in the line of creditors.  New financiers are unlikely to want to get behind existing creditors, and existing creditors are unlikely to want to let any new creditors in front of their position.

The notion that Ambac was once a $100 stock matters not.  The stock has been under the penny-stock classification since the recession and is currently under $1.00.  It is also under a delisting warnings from the NYSE due to its share price.

Shares fell from $0.90 before earnings to $0.70 the following day.  Mid-day Friday has shares down around $0.67 and the 52-week trading range is $0.51 to $3.39, although that $3.39 was only one days and there have really only been a few days where Ambac even traded above $2.00 per share.

If you are an Ambac shareholders that wants to just ride this to zero and hope for the best, you might want to call the registrar and ask for physical delivery of your share certificates in individual lots of 100 shares.  At least that way you will have wallpaper for your next home remodel when times get better.

If a white knight exists out there that wants to save Ambac, he or she has kept it an incredible secret.  Does Ambac have days that its stock still trades?  Likely.  Does Ambac have weeks?  Probably, maybe.  Does Ambac have months?  Maybe a few.

Anything is possible.  The problem is that hoping and praying are not good business and investing strategies alone.  There needs to be meat or promise present before hope and prayer will save a company like Ambac.

JON C. OGG