Canyon Capital Planning Proxy Challenge to Ambac Board

Mar 2 2016 | 7:33pm ET

By Michael Flaherty and Mike Stone (Reuters) - Hedge fund Canyon Capital Advisors is preparing to challenge the leadership of Ambac Financial Group by putting its own nominees up for election to the bond insurer's board, people familiar with the matter said Wednesday.

Canyon, which holds a 4.5 percent stake in the company, has been seeking to persuade Ambacto find ways to accelerate the settlement of $4 billion in insurance claims. Canyon has built a significant economic interest in these claims, and so would benefit from such a move.

The hedge fund plans to put forward at least three nominees to stand for election on Ambac's six-member board of directors ahead of a March 15 deadline, the people said on Wednesday, setting up a proxy contest. Details of its proposed slate are still being finalized, the people added.

Among the candidates under consideration for Canyon's slate are restructuring veteran Eugene Davis and John Brecker, a partner of financial services firm Drivetrain Advisors.

Reuters could not immediately reach Davis or Brecker for comment.

The people familiar with the matter asked not to be identified because the deliberations are confidential. Ambac declined to comment, while Canyon did not immediately respond to requests for comment.

The policy claims relate to complex financial instruments such as secured mortgage-backed securities, which started to see heavy defaults around 2007-2008, helping to trigger the financial crisis. The stream of claims on Ambac led the insurer into bankruptcy in 2010.

Canyon previously pushed Ambac to ask its regulator, the Commissioner of Insurance of the State of Wisconsin, to accelerate Ambac's settlement of the claims. Ambac has argued the matter is entirely in the hands of the regulator.

While the regulator has no say on who sits on Ambac's board, it can veto appointments at the board of Ambac's operating subsidiary which oversees the handling of the insurance claims.

Canyon has asked Ambac to buy back the claims itself in the open market or offer policyholders cash for their policies, in a practice known in the industry as commutation. It has argued that by paying the claims earlier, Ambac will save on the interest that would otherwise accrue and would not have to pay face value when the claims mature.

Ambac responded in the fourth quarter by purchasing $235 million of insured securities, including $200 million of insured residential mortgage-backed securities. It purchased a total of $635 million of its insured securities in 2015.

According to recent data, Ambac held nearly $1.2 billion, or 34 percent, of the deferred obligations of the segregated account where the troubled insurance claims are held.

Canyon has also raised corporate governance issues at Ambac, questioning the pay and performance of the company's chief executive Nader Tavakoli.

Ambac said last month that its operating earnings of $481 million in the fourth quarter of 2015 were the highest they have been for any quarter since Ambac emerged from bankruptcy in 2013.

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