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Ambac Financial Group Plunges 50% After Missing Interest Payment

|Includes: Ambac Financial (AMBC)

Ambac Financial Group (NYSE:ABK) said today that its board decided not to make the scheduled interest payment due today for its 7.50% Debentures due May 1, 2023.

If the interest is not paid within 30 days of today, Ambac will be deemed to be in default, after which the note holders will be able to demand earlier repayment of principal.  The company’s next scheduled interest payment is November 15, 2010.

Since it has not been able to raise new capital, the company said that it is looking to restructure its debt through a prepackaged bankruptcy plan, a bankruptcy plan designed with cooperation from debtholders to speed up the reorganization process.  If an agreement cannot be reached on the prepackage plan, the company will file Chapter 11 bankruptcy before the year end.

The company ability to use its $7 billion net operating loss tax carry forward-an accounting method that uses prior losses to offset profits in order reduce tax liability-may be limited should it file for Chapter 11.  Under U.S. tax rules, the ability to use loss tax carry forwards would be limited if an ownership change were to occur. 

For Ambac, that event that would be triggered if a party buys its debt allowing control of 5% or more of the company’s stock after reorganization less than 18 months prior to the bankruptcy filing. 

Since the announcement, Ambac’s shares have shed almost have its market value to close at $0.41.

Disclosure: No positions