Ambac Financial Group, Inc. (NYSE: ABK) is signaling that the company is on the verge of implosion, which is not real shock if you have been following the situation since the financial meltdown.  The company had already warned that bankruptcy was a possibility.  An SEC filing from this morning shows that Ambac’s board of directors voted against making a regularly scheduled interest payment on a bond issue.

The decision was reached on Friday on its 7.50% debentures due May 1, 2023 and the interest payment was scheduled to be made this morning (NOV. 1).

Ambac has 30 days to pay the interest, otherwise there is a default and the holders of the notes will be able to accelerate the maturity of the notes.

As of June 30, 2010, Ambac had total indebtedness of $1,622 million. More importantly, the next scheduled payment of interest is November 15, 2010.

The troubled insurer noted that it has has been unable to raise additional capital as an alternative to seeking bankruptcy protection.  Ambac is now seeking to restructure its outstanding debt through a prepackaged bankruptcy proceeding.  Here is the biggie and the issue that would likely create a goose-egg for holders of the common stock: “If the Company is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy under Chapter 11 of the United States Bankruptcy Code prior to the end of the year. Such filing may be with or without agreement with major creditor groups concerning a plan of reorganization. The filing for bankruptcy protection would accelerate the maturity of all of the Company’s indebtedness.”

Ambac also listed that it has an estimated $7.0 billion net operating loss tax carry forward, although that asset could greatly change in a change of control.

Some companies are able to pull rabbits out of the hat and keep surviving.  While Ambac’s fate has not sealed, holders of common stock need to be reminded that it is the debt holders rather than the common stock holders who usually have a say in the bankruptcy process.  It is also usually the debt holders who emerge as the new owners after a Chapter 11 process.  Bankruptcy does not always wipe out the common holders.  That is just usually the case.

Ambac had recently gained some interest before selling off in hopes that it could take back money from some banks who were involved in mortgage fraud in the current foreclosure and mortgage fraud mess you have seen over the most recent weeks.  Shares closed at $0.83 on Friday, but the stock is down 43% at $0.47 this morning on almost 4 million shares with more than an hour remaining before the stock market even opens.  The 52-week range is $0.40 to $3.39, and the stock was exponentially higher back before the mortgage mess and before the financial meltdown.

JON C. OGG