By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- Banks including Citigroup Inc. and Deutsche Bank AG will get cents on the dollar from guarantees they bought from a unit of bond insurer Ambac Financial Group during the credit boom, according to a regulatory filing Tuesday.
The banks will also get notes issued by the unit, Ambac Assurance Corp., that pay interest at a 5.1% annualized rate and that mature in 2020.
New York-based Ambac /quotes/nls/abk (ABK 0.53, +0.01, +1.51%) , one of the world's largest bond insurers, got hit hard during the financial crisis because it had sold guarantees on billions of dollars of mortgage-related securities including collateralized debt obligations, or CDOs. These securities turned toxic, leaving the company on the hook for losses and threatening its survival.
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Ambac, after having tried to unwind its most toxic guarantees, finally succumbed to regulatory intervention earlier this year. Sean Dilweg, Wisconsin's insurance commissioner, seized part of Ambac, separating its most troubled guarantees to try to protect policyholders of the company's more stable business -- insuring municipal bonds.
The agreement disclosed Tuesday is part of this rehabilitation plan. Ambac said it will pay the banks a total of $2.6 billion in cash and $2 billion of new surplus notes. In return, the banks agreed to commute, or tear up, $16.4 billion of guarantees on CDOs.
The settlement means the banks will be paid nearly 16 cents on the dollar in cash and just over 12 cents on the dollar in new Ambac debt.
The banks involved are Citibank, part of Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 3.92, +0.08, +2.08%) , as well as Royal Bank of Scotland (UK:RBS 47.55, +1.72, +3.75%) , Barclays /quotes/comstock/23s!a:barc (UK:BARC 323.35, +15.35, +4.98%) /quotes/comstock/13*!bcs/quotes/nls/bcs (BCS 19.97, +0.93, +4.88%) , Deutsche Bank /quotes/nls/db (DB 63.74, +1.78, +2.87%) and Spain's Banco Bilbao Vizcaya Argentaria /quotes/nls/bbva (BBVA 12.89, +0.42, +3.37%) and Banco Santander /quotes/nls/std (STD 12.76, +0.36, +2.90%) , BNP Paribas /quotes/comstock/24s!e:bnp (FR:BNP 54.89, +1.39, +2.60%) , Canadian Imperial Bank of Commerce /quotes/comstock/13*!cm/quotes/nls/cm (CM 72.29, +0.84, +1.18%) , Commerzbank AG /quotes/comstock/11e!fcbk (DE:CBK 6.50, +0.23, +3.60%) , Credit Agricole /quotes/comstock/11i!crary (CRARY 6.94, +0.36, +5.47%) , Natixis /quotes/comstock/24s!e:kn (FR:KN 4.76, +0.05, +1.04%) , Rabobank, Societe Generale /quotes/comstock/24s!e:gle (FR:GLE 44.07, +1.92, +4.56%) and UBS AG /quotes/nls/ubs (UBS 17.97, +0.42, +2.39%) .
"This settlement allows Ambac to reduce the amount of total claims by billions of dollars, to the direct benefit of the remaining policyholders," Dilweg said in a statement.
Shares of Ambac Financial, the holding company, rose 3.9% to close at $1.07 on Tuesday.
Ambac Assurance is domiciled in Wisconsin, so it's regulated by the state's Office of the Commissioner of Insurance, headed by Dilweg.
The settlement agreement with the banks includes covenants that restrict Ambac Assurance to runoff operations only -- as long as the surplus notes remain outstanding, according to the filing. Runoff is when insurers don't sell new policies, while paying claims until existing contracts expire.
In its filing Tuesday, Ambac also said it settled another $1.4 billion of guarantees for $96.5 million in cash.
The company expects to settle other guarantees worth up to $1.4 billion over the next year. That settlement will cost no more than $115 million in cash and will include $60 million of new surplus notes, the company explained.
Alistair Barr is a reporter for MarketWatch in San Francisco.
