This piece first published January 4, 2017, Debtwire Municipals
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Representatives from the City of Scranton will meet with Ambac this week to discuss a proposal from the insurer to refinance a portion of the city’s Ambac-wrapped debt, Business Administrator David Bulzoni confirmed to Debtwire Municipals.
Ambac has about USD 40m in exposure to Scranton. The debt targeted for a refinance belongs to the city’s Series 2003 issuance, specifically the Series 2003C pension obligation bond and Series 2003D taxable general obligation bonds, Bulzoni said.
There was USD 14.62m outstanding on the Series 2003C POBs and USD 8.17m outstanding on the Series 2003D general obligations, according to Electronic Municipal Market Access (EMMA). If the city refinances the debt, it would likely carry a higher coupon than it did at issuance, said a source familiar with the situation. Many issuers are happy to have insurance and may not want to refinance because the rates aren’t there, said the source.
“Ambac is, as is the city, interested in the prospect of refunding some of the series of that debt,” Bulzoni said. “The yield is 5% – I’m not sure what you can achieve on a taxable refunding that will give a reduction in yield to make it worthwhile (for the city).”
Scranton has about USD 135.2m in debt outstanding, according to a December 2016 official statement. Last week, the city closed the USD 195m sale of its sewer system, netting about USD 75m; the city expects to use the funds to refinance other debt issues and shore up its troubled pension funds, as reported.
Ambac is embarking on liability management of its own. It is scouring its portfolio to find opportunities to improve its balance sheet by reducing exposure to credits with callable debt, the first source familiar and two more sources said.
If the Scranton deal is successful – negotiations between the insurer and city are ongoing – Ambac would move forward to other credits to work out a similar deal, said the three sources.
Chicago, the New Jersey Casino Reinvestment Development Authority (CRDA), and the Essex County Improvement Authority are among the credits under consideration for such a proposal, said the sources familiar. Representatives for Chicago and CRDA denied conversations with Ambac about the matter; a request for comment from the Essex County Improvement Authority was not returned. A spokesperson for Ambac did not respond to a request for comment.
Ambac lacks prospects for new business, so their strategy involves looking for ways to reduce risk, said William Bonawitz, director of municipal research at PNC Capital Advisors.
The strategy could be something of a pipe dream – depending on what Ambac offers, there’s little incentive for issuers to refinance or issue debt without insurance, Bonawitz said. Some issuers could be content to maintain the status quo through maturity, he said.
“The chances of issuers doing that economically are fairly low,” Bonawitz said. “It would be an accounting positive (for Ambac), using cash collected and turning that to earnings, as opposed to the reserve they hold against (policies).”
The move would remove the issuer from Ambac’s portfolio, reducing the exposure and protecting the insurer against the prospect of future losses, Bonawitz said.
In a November 2016 investor call, Nader Tavakoli, the insurer’s former president and CEO said the insurer reduced the insured portfolio by USD 8bn, to USD 86bn in 3Q16, through calls and refundings in the public finance portfolio. Tavakoli resigned in December and Claude LeBlanc became Ambac’s president and CEO effective 1 January, as reported.
“Our adversely classified book is high-touch requiring our active workout and structuring expertise and in some cases, economic contribution to eliminate or commute the risk,” Tavakoli said during the call. “We were also being proactive in managing down our investment grade public finance book where we’ve been actively engaged in educating and encouraging borrowers to refinance and thereby relieve us of our policy obligations.”
Effectively, Ambac is shrinking the size of its portfolio, without writing new business, Bonawitz said. The strategy does not change the risks associated with the portfolio, only earnings – without new cash flow, he said.
A USD 9.21m tranche of 5.6% Series 2003C Scranton pension obligation bonds due 2033 last traded in odd lots at 96.85 to yield 5.898% on 3 January.
by Maria Amante