Deutsche Bank, Mudrick Sue Ambac Over $65 Million Transfer

Deutsche Bank Securities Inc., Mudrick Capital Management and other noteholders of Ambac Assurance Corp. sued the bond insurer for allegedly making an unauthorized transfer of $65 million to its parent company.

The creditors, which also include CQS and Shenkman Capital Management, said in a lawsuit filed earlier this month in New York the transfer violated a term of Wisconsin-domiciled Ambac’s rehabilitation — the equivalent of Chapter 11 for insurers. They pointed out that they have not been paid principal or interest on their notes since 2018.

The dispute is the latest wrinkle in the long-running travails of Ambac, which was the world’s second-largest bond insurer on the eve of the 2008 global financial crisis. The firm fell into severe distress when the market for collateralized debt obligations tied to the US subprime mortgage industry collapsed. It started rehabilitation proceedings in 2010 and exited them in 2018.

Over the years, Ambac has brought numerous lawsuits against underwriters like Bank of America Corp., accusing them of improperly passing on the risks of mortgage-backed securities to the insurer.

Surplus Notes

The creditors who sued Ambac on March 12 hold the so-called surplus notes that were issued to policyholders as part of Ambac’s rehabilitation. They say they had an agreement with Ambac by which any transfer of more than $5 million requires the approval of Wisconsin’s insurance commissioner.

According to the complaint, Ambac transferred $65 million to its parent company, Ambac Financial Group, to acquire a stake in Beat Capital Partners Ltd. Though Ambac Assurance had a pre-approval letter from the state commissioner for insurance-related co-investments with its its parent company up to $75 million, the creditors claim the structure of the deal as an intercompany loan doesn’t qualify as a co-investment and benefits Ambac shareholders over noteholders.

Spokespeople for Ambac, the Wisconsin OCI, Deutsche Bank, Mudrick Capital and Shenkman Capital declined to comment, while a representative for CQS didn’t reply to a request for comment.

In the suit, the creditors said Ambac’s counsel told them that their allegations were “based on erroneous and uninformed factual allegations and misleading statements,” including an “incomplete and inaccurate” characterization of the Beat Capital investment.

According to an Ambac Financial Securities and Exchange Commission filing from last year, the insurer’s surplus notes had a $519 million current principal outstanding and unpaid interest of $475 million, as of end of 2023. Since their 2010 issuance of the notes in 2010, the Wisconsin OCI has only permitted two exceptional payments and has declined to approve any regular payments, according to the filings.

Oaktree Sale

The creditors who brought the March 12 suit hold about 50% of the surplus notes.

Last June, Ambac Financial agreed to sell its legacy financial guarantee business, including the bond insurer, to funds affiliated to Oaktree Capital Management. According to the suit, that sale was structured in a manner “intended to harm AAC, forfeit valuable tax attributes in contravention of AFG’s commitments, and to leave the surplus notes matured and unpaid”.

Creditors also claim that the insurer’s board — which overlaps with the Ambac Financial board — chose to pursue a transaction that “only benefits AFG as the holding company.”

Top photo: Pedestrians pass in front of Deutsche Bank headquarters in New York on Tuesday, Jan. 28, 2025. Photographer: Michael Nagle/Bloomberg.