Wednesday, February 26, 2014

G'day Bond Insurers

There's nothing surprising in Syncora's announcement of a settlement with JP Morgan. The only "new new" to us is the timing, and while that was highly uncertain it can't be called a surprise. As predicted, the stocks are better indicators of news than headlines. Ambac's stock is telling us that JPM's most recent dose of reality in it's litigation reserves may filter through to the their settlement discussions as well.

Syncora is an easier settlement for the banks than some other FGs because of its size, other trouble spots in its portfolio, and the 2009 MTA restructuring which resulted in about half SYCRF common and all of newly created preference shares being issued to structured finance counterparties. In many cases these were the same banks that were across the table in R&W litigation talks. These all provide opportunities to disguise the actual value of the R&W settlement.

Being a smaller insurer also made it easier to compile the deal level loss data on Syncora. I think I've published this before but regardless you can check it out here. Syncora ought to have targeted full recovery of actual and expected paid claims and we would be surprised if they took anything less than 85%. Not counting losses neutralized by previous restructuring, these loses were definitely over 210M and very likely over 225M. (Note this excludes the BSSP 2007 R5 deal because it's been a while since we've reviewed the indenture in this more exotic securitization trust.) Given the size of Syncora's current R&W recovery benefit and it's claims against Greenpoint, Syncora's economic benefit from settlement is very very likely more than 75M above accounting benefit marks and probably closer to double that.

Whether or not this will be clear in Syncora's financial statements will be determined by the structure of the settlement. For example the full cash value that JPM paid could have been reduced by, trading  Syncora corporate securities or insured securities that JPM likely carried far below market value and farther below par. JPM could also have indemnified Syncora on other exposures.

Ambac continues to be a harder pill to swallow for its R&W counterparties, mostly because of the dolars involved. However, the results and methods we used in this spreadsheet (originally published in this Sept 2012 post) have been confirmed by Bank of America's new disclosure of "over $2.5B" in R&W of Ambac loss compensation claims. Any overestimation of claims in the spreadsheet are most likely compensated for in there being no accounting for other lawsuits and non-litigious recoveries. Furthermore given Ambac's stated intent and position of strength in its breach of contract cases and preliminary success in its fraud cases, the company will likely experience greater than 100% recoveries if only due to interest and legal cost recoveries and not punitive damages for fraud. 

The legacy securities of the DISCs that we recommended buying (and bought) at a rounding error from zero are now at the equivalent of a DISC at 40. And while it's a fair time for a victory lap, Ambac common and especially the warrants still seems like a compelling long-term investment. The warrants offer similar upside to an economic book value as Syncora common, with a higher quality portfolio, better disclosures, and management seemingly more intent on full recoveries of R&W (and maybe even fraud) claims. Both are compelling.

As an aside it's worth noting that while the surplus notes are now trading near par, the perpetual preferred are now trading at 33 by way of Alliance Semiconductor common stock (ALSC, thank you Stephen Pendergast). The Surplus notes are a senior claim and will eventually have cumulative fixed interest (versus non-cumulative non-fixed). I can't figure out if this is a screaming bargain or a trap. Consider for instance that American Overseas (formerly RamRe) is playing hardball with preferred security holders, placing $3 million in a trust to redeem par value of many times that of preferred securities at maturity in 2066. When in doubt, stay without.

That's all for now.

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