Assured (AGO) and Ambac (AMBC) continued to navigate the storm in Puerto Rico as the center of attention shifted from San Juan to Washington, D.C. As of this writing, there has not been a definitive answer from Congress as to what changes, if any, will be made to assist in a restructuring of Puerto Rico’s obligations. Coupon payments due in May and June, followed by the gubernatorial election later in the year, will likely force the issue although plenty of stops-and-starts are to be expected.
AGO continues to forge ahead, posting solid operational results and good capital allocation. We maintain a sizeable investment in AGO given my anticipation of continued progress even in the face of Puerto Rico’s troubles. I still judge the valuation and return profile as favorable, but our investment will be reevaluated as the situation unfolds.
In my opinion, AMBC has progressed less favorably. Here again, Puerto Rico may prove to be manageable from an economic standpoint, but the derivative impact on AMBC’s relationship with stakeholders and the regulators may be more substantial and detrimental.
Ambac’s board of directors also continues to confound. After nearly 15 months – and more than two months after finally resolving the CEO search at the parent company – Ambac replaced the interim CEO of the operating subsidiary, David Trick, with Nader Tavakoli, the aforementioned CEO of the parent. Why that decision took as long as it did is inexplicable, particularly given the result.
The governance issues don’t stop there. Ambac was engaged in a proxy fight with Canyon Capital, one of its large policyholders that also owns Ambac stock. Among other issues Canyon alleges poor performance by Mr. Tavakoli specifically and the company more generally, and Canyon is seeking to install its own director(s). That fight is ongoing, although Ambac has preemptively upgraded its board by replacing two directors with David Herzog, the retiring CFO of AIG, and Ian Haft, a partner at Cornwall Capital (fans of “The Big Short” will recognize the name). Having a shareholder representative on the board is a significant step in the right direction, and a large block of shareholders (representing 18.5% of Ambac’s shares) signed a Support Agreement in favor of the appointments.
As Puerto Rico grinds forward – and creates uncertainty along with some genuine risk – there are other policyholder concerns. Carval, a large policyholder, sued the Wisconsin regulator in an attempt to force the acceleration of payments on Ambac’s insured obligations in its Segregated Account. That attempt has been stymied for now but I believe it will likely resurface as it appears to be a result of the stalled negotiations in the Segregated Account.
Finally, the Countrywide/Bank of America litigation is still pending. As noted previously, I expected the Countrywide case to be settled by now, and it is a major piece of the puzzle. A trial date has not been set, and it is possible that the situation will languish through the end of the year or beyond.
The above commentary is excerpted from the 1Q16 quarterly letter of Anabatic Investment Partners LLC. The fund’s Managing Principal and Portfolio Manager is Philip C. Ordway. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.
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