The 'Ick Factor', Together With Ambac Every Mo An Interesting Long
July 26, 2017
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I have got flora that a fruitful house to facial expression for expert investment ideas is with stocks that endure from what mightiness best last described every bit the 'ick factor' - i.e. it feels also icky to touch. And I have got flora that the to a greater extent than immediate in addition to visceral the revulsion to the rattling thought of looking at a detail stock/industry/country, the better. The ideal reaction you lot desire when you lot float an thought to most people is immediate disgust/dismissal. If you lot larn that you're quite frequently on to something.
This is so for many reasons. For a start, it goes without maxim that increase & fashion-chasing investors are unlikely to last interested inwards picking over dead carcasses, but the ick constituent also way that a lot of otherwise intelligent in addition to contrarian value investors, who to a greater extent than frequently than non human activity every bit the buyers of in conclusion resort inwards out of favor industries/stocks/countries, are also unlikely to fifty-fifty bother looking at it. This tin resultant inwards larger-than-average degrees of undervaluation.
Furthermore, institutional investors volition also to a greater extent than frequently than non shy away from such stocks due to the greater-than-average flat of career in addition to reputation jeopardy such corners of the marketplace carry. It is piece of cake plenty to empathize why: if you lot purchase something acceptable to ain similar Facebook in addition to lose money, good so Facebook negatively surprised everyone; but if you lot purchase something unpopular in addition to maligned in addition to lose money, good so you lot are plainly a consummate idiot in addition to should last fired.*
What the inwards a higher house way is that the potential shareholder constituency for such stocks is probable to last extraordinarily limited, in addition to so that the flat of demand for the stock probable to last rattling low. And inwards my opinion, forced selling aside, portion prices are unremarkably determined to a greater extent than yesteryear the flat of demand than the flat of supply, every bit the flat of the latter (the position out of shares outstanding in addition to potentially available for sale) is relatively fixed. Low levels of demand so to a greater extent than frequently than non hateful depression valuations. In addition, with less eyes on the stock, signs of positive alter tin sometimes last reflected inwards prices to a greater extent than tardily than they would last inwards other industries.
There is also an payoff from a technical standpoint, inwards that such stocks stand upwardly for the mirror icon of the so-called 'crowded trade' which tin last dependent land to periodic vehement pullbacks. It is frequently forgotten that portion toll movements are driven yesteryear changes of opinion, which so drive changes inwards investor positioning, non what is currently good known in addition to already reflected inwards investors' portfolios. This is a fundamentally of import truth to empathize in addition to internalize.
This is the argue why markets have got a vogue to confound in addition to confuse most investors in addition to commentators. If everyone already believes something, they are probable to have got already expressed those beliefs inwards past buying in addition to selling decisions, which have got already impacted marketplace prices. Once everyone is bullish in addition to long, prices are liable to top out because at that spot is no ane left to buy. Consequently, exactly about other payoff of owning stocks that endure from the 'ick' constituent is that they are frequently heavily under-owned, in addition to hence have got relatively few potential sellers left. This way the stocks are frequently (but non always) comparatively resilient to negative news.
Lots of value investors similar to bottom-fish in addition to purchase stocks that are or have got late fallen sharply. I practise that also sometimes, but I prefer to purchase something that has non exclusively already dropped a long way, but which has also already 'bounced along the bottom' for an extended catamenia of fourth dimension on depression volume. This procedure tends to steadily sift-out all the weak/impatient holders, piece stock is tardily accumulated yesteryear strong hands - unremarkably hard-core contrarian, longer-term holders similar myself. Particularly bullish is when such stocks neglect to elicit much reaction to bad news, in addition to a rattling strong purchase signal comes when such companies present early on signs of positive cardinal change.
Ambac
One possible illustration of an 'ick factor' stock at the 2nd is bond insurer Ambac (AMBC US). (This is far from the best example, but I exactly occur to have got been researching the stock this weekend in addition to felt similar writing close it; much ameliorate examples hail from Hellenic Republic in addition to Russia, where I've made a tonne of coin inwards the yesteryear twain of years, every bit good every bit mining & mining services inwards early on 2016). The stock's electrical current marketplace capitalization is close US$900m.
There are few stocks that investors every bit instinctively recoil from every bit bond insurers - especially bond insurers that went bankrupt during the global fiscal crisis underwriting securized mortgages that defaulted inwards large numbers (the companionship was restructured, emerged from bankruptcy in addition to re-listed inwards 2013). Hence, at that spot is potential chance hither worth investigating.
The Holding companionship distinction
The starting fourth dimension betoken to emphasise when looking at Ambac is that what you lot are buying is truly a holding company called Ambac Financial Corp (AFC), not the bond insurance operating companionship Ambac Assurance (AAC). The latter is exactly a wholly-owned subsidiary of AFC, in addition to it is this entity that houses all of the Ambac Group's fiscal guarantee obligations.
This is non a trivial distinction, because it is AAC not AFC that is regulated; is required to hold a certainly amount of regulatory capital; in addition to which is dependent land to the risks its US$70bn inwards outstanding bond guarantees represent. AFC is non obligated to position to a greater extent than coin into AAC if its reserves prove inadequate to encompass bond insurance losses, due to typical limited legal liability in addition to an absence of cross-company guarantees from the belongings company. Consequently, the minimum value of AAC to AFC is zero, which is rattling of import because it caps the size of AFC's potential losses.
The belongings companionship currently has 3 key sources of value. Firstly, it has cash in addition to investments of US$347m (as at 1Q17). In addition, it has entered into clever tolling agreements with AAC regarding the utilization of revenue enhancement losses that the companionship expects volition allow it to upstream an additional US$165m inwards cash inwards the adjacent few years from AAC without regulatory blessing (AAC needs blessing for all distributions/dividends to ensure it has sufficient claims-paying resources to come across hereafter obligations, inwards the eyes of regulators). If in addition to when these additional tolling payments are received, the belongings companionship volition have got close US$500m of cash & investments.
Secondly, AFC has US$1.4bn of revenue enhancement loss ship forwards (separate to the US$2.6bn that be inwards AAC - both of which are off-balance-sheet), which expire during 2029-33. Based on the US electrical current revenue enhancement charge per unit of measurement of 35%, if fully utilized, these US$1.4bn inwards revenue enhancement loss ship forwards would last worth US$490m (gross, undiscounted), in addition to AMBC management has said it is investing diverse commercial transactions which would allow these NoLs to last utilised.
The NoLs are worth considerably less than US$490m. Firstly, whatever reduction inwards US corporate revenue enhancement rates volition cut their value, in addition to such a reduction is currently nether discussion. If nosotros assume revenue enhancement rates are reduced to 25%, this volition cut their gross value to US$350m. In addition, farther discounts are needed for (1) the jeopardy that they volition non last fully utilized prior to expiration, in addition to (2) for the fourth dimension value of money. However, fifty-fifty if nosotros adopt a conservative approach in addition to convey a 50% discount for both (i.e. a 75% cumulative discount), these NoLs would last worth a piddling nether US$100m. Together with the cash in addition to investments above, this would value the belongings companionship at US$600m, or close US$12/share, excluding AAC. Meanwhile, the shares late changed hands at US$17/share (although have got popped inwards the in conclusion few days to US$20/share).
The inwards a higher house is of import because it reduces the downside jeopardy yesteryear two-thirds. Most investors probable assume that the downside is to cipher if a bunch of AMBC's insured bonds blow upwardly in addition to wipe out the bond insurance company's equity, but that is non the case. The powerfulness of this ex-AAC belongings companionship value to reducing the potential downside yesteryear two-thirds, piece investors soundless have got total exposure to the AAC upside, is a rattling of import valuation nuance that is lost on many observers.
Including the value of AAC
The tertiary in addition to in conclusion origin of value to AMBC is the option value embedded inwards the eventual value of its wholly owned subsidiary AAC, which houses all of the group's fiscal guarantees in addition to the bulk of the group's working capital alphabetic lineament in addition to investments.
The value is potentially significant. Indeed, later AMBC's late announced negotiated short town with creditors of its rehabilitated segregated account, the company's consolidated adjusted bulk value volition rising to close US$40/share, or close US$30/share excluding the cash to last held at the belongings companionship flat every bit previously discussed. Furthermore, using the same methodology every bit above, AAC also has an additional US$160m worth of deferred revenue enhancement assets (US$2.4bn inwards gross NoLs) that are off residual sheet, or close exactly about other US$3/share.
In other words, including off-balance-sheet DTAs, AAC's adjusted bulk value is worth close US$33/share, in addition to with the AFC belongings companionship worth an estimated US$12/share excluding AAC, this implies a total valuation of close US$45/share. Meanwhile, the stock is currently trading at close US$20/share.
What is AAC probable to ultimately last worth? I don't know. But at US$20/share, the marketplace is implying that AAC is worth exclusively US$8, or close 26-27% of adjusted bulk value, in addition to close 24% of adjusted bulk value including the value of its deferred revenue enhancement assets. Let's telephone band it a circular 25%. The marketplace is so effectively maxim at that spot is a 75% jeopardy AAC is worth zero, in addition to exclusively 25% jeopardy the assets are worth adjusted book.
That appears much also pessimistic. The companionship is currently inwards run-off way (i.e. is non writing whatever business), in addition to has delevered since emerging from bankruptcy inwards 2013 from at 35:1 ratio of insured obligations to claims paying resources, to exactly 13:1 at present. It's total insured par has shrunk from a summit of US$550bn instantly prior to the GFC, to exactly US$70bn today.
This run-off in addition to deleveraging dynamic is important, because every bit the company's leverage declines, the companionship volition liberate regulatory capital, in addition to this working capital alphabetic lineament volition so conk available to upstream to the belongings companionship level, in addition to last used to buy-back shares - something that would last rattling accretive at the electrical current portion price. In addition, the risks attached to the company's adjusted bulk value reject every bit leverage declines, which should also lessen the discount the marketplace is applying.
Most of AMBC's remaining exposure is US municipal obligations, with its structured finance in addition to existent estate exposure having been significantly reduced. With existent estate prices rising in addition to the US economic scheme doing quite well, most of AMBC's remaining run-off exposures are inwards expert wellness at present, with the notable exception of Puerto Rico (see below). In addition, the companionship has been having success with R&W (representation in addition to warranty) litigation against the large banks for simulated representations made yesteryear the banks to Ambac on pre-GFC-era existent estate securitisation guarantees made (as a series banking concern shareholder, it is prissy to ain a stock on the other side of the litigation divide!) The companionship has already included an approximate of hereafter litigation settlements on residual sheet, but nosotros believe those estimates are probable to last on the conservative side, which creates additional upside risks to adjusted bulk value inwards coming years.
Puerto Rico
Puerto Rico's troubled finances have got been inwards in addition to out of the fiscal press, in addition to significantly pressured the portion prices of all the major US municipal bond insurers before this year. AAC has US$2bn of par exposure, but has already reserved for a one-third loss, which appears sufficiently conservative (i.e. they could restructure with PR to cut the human face upwardly value of outstanding bonds yesteryear 1/3rd in addition to this would non comport upon cyberspace bulk value). The US$1.3bn of unreserved exposure represents close US$26/share, in addition to US$20/share cyberspace of available revenue enhancement deductions (which may or may non last utilizable). At US$20/share the marketplace has already written downward AMBC's US$45 adjusted bulk value including DTA assets to a flat that assumes a 100% PR loss which seems highly unlikely.
Indeed, ane of the genuine sources of value bond insurers provide is their powerfulness to renegotiate work loans inwards society to mitigate potential losses, every bit good every bit engage inwards litigation where necessary, which is something most bond investors are abhor (or simply unable) to do. In addition, the companionship is sometimes able to purchase the bonds it has insured inwards the secondary marketplace at sudden discounts to par for loss mitigation purposes (if the bonds default, they pay out less than 100c inwards the dollar every bit they have got bought them on the secondary marketplace at a discount, in addition to if the loans are successfully worked out, they merchandise dorsum upwardly to par in addition to AMBC is able to sell out at a profit). Much of the company's PR insured exposure is also non to full general obligation bonds, but to specific revenue bonds (which entail claims against specific infrastructure assets, for example, or sales revenue enhancement income streams), which - provided the dominion of police clit is upheld - cannot last simply repudiated yesteryear PR (which they have got attempted to do; they are existence taken to courtroom yesteryear bondholders). It is likely, on an expectancy basis, that AAC is adequately reserved for its PR exposure at this betoken inwards my view.
Conclusion
All told, AMBC looks similar an interesting value long. It is the form out of situation, however, where you lot cannot have got 'high conviction' inwards the outcome - exclusively high conviction that the risk/reward is attractive - in addition to so it makes sense to adopt a basketed approach. I currently have got a 30bp seat inwards AMBC, 15bp inwards MBI, 80bp inwards AGO; or an aggregate sector exposure of slightly to a greater extent than than 1%. I also have got a 65bp seat inwards GNW, which has exactly about mortgage bond-insurance operations (which I'm uncomfortable with to last honest), but this is to a greater extent than of a merger-arbitrage play with a deep-value value backing if the bargain falls through, than a monoline play).
LT3000
*Incidentally, I am a huge fan of Bill Miller, in addition to Bill Miller has been an obvious casualty of this career jeopardy asymmetry. Despite beating the S&P 500 for xv consecutive years upwardly until the GFC; five consecutive years over again recently; in addition to beating the marketplace throughout the 1999-2017 catamenia cumulatively (i.e. including the GFC losses) by 200-300bp - all-time hall-of-fame type numbers - he is widely regarded every bit existence a reckless & failed investor because he fared rattling poorly during the GFC betting on bombed-out financials that went to zero. It was a risky bet, to last sure, in addition to ane that inwards hindsight was mistaken, but it is seldom considered that had Lehman had non been allowed to neglect in addition to had other US institutions non been dependent land to forced nationalizations, he would probable have got made an absolute fortune. We volition never know what the truthful ex ante probabilities were.
Bill Miller is proof of Keynes' admonition that 'it is ameliorate for reputation to neglect conventionally than to succeed unconventionally'
The inwards a higher house analysis is furnished for informational/entertainment purposes only, in addition to is non to last construed every bit investment advice. The writer provides no warranty whatsoever every bit to the accuracy of the contents of the post, in addition to reserves all rights to merchandise inwards whatever securities mentioned inwards whatever article at whatever time.
This is so for many reasons. For a start, it goes without maxim that increase & fashion-chasing investors are unlikely to last interested inwards picking over dead carcasses, but the ick constituent also way that a lot of otherwise intelligent in addition to contrarian value investors, who to a greater extent than frequently than non human activity every bit the buyers of in conclusion resort inwards out of favor industries/stocks/countries, are also unlikely to fifty-fifty bother looking at it. This tin resultant inwards larger-than-average degrees of undervaluation.
Furthermore, institutional investors volition also to a greater extent than frequently than non shy away from such stocks due to the greater-than-average flat of career in addition to reputation jeopardy such corners of the marketplace carry. It is piece of cake plenty to empathize why: if you lot purchase something acceptable to ain similar Facebook in addition to lose money, good so Facebook negatively surprised everyone; but if you lot purchase something unpopular in addition to maligned in addition to lose money, good so you lot are plainly a consummate idiot in addition to should last fired.*
What the inwards a higher house way is that the potential shareholder constituency for such stocks is probable to last extraordinarily limited, in addition to so that the flat of demand for the stock probable to last rattling low. And inwards my opinion, forced selling aside, portion prices are unremarkably determined to a greater extent than yesteryear the flat of demand than the flat of supply, every bit the flat of the latter (the position out of shares outstanding in addition to potentially available for sale) is relatively fixed. Low levels of demand so to a greater extent than frequently than non hateful depression valuations. In addition, with less eyes on the stock, signs of positive alter tin sometimes last reflected inwards prices to a greater extent than tardily than they would last inwards other industries.
There is also an payoff from a technical standpoint, inwards that such stocks stand upwardly for the mirror icon of the so-called 'crowded trade' which tin last dependent land to periodic vehement pullbacks. It is frequently forgotten that portion toll movements are driven yesteryear changes of opinion, which so drive changes inwards investor positioning, non what is currently good known in addition to already reflected inwards investors' portfolios. This is a fundamentally of import truth to empathize in addition to internalize.
This is the argue why markets have got a vogue to confound in addition to confuse most investors in addition to commentators. If everyone already believes something, they are probable to have got already expressed those beliefs inwards past buying in addition to selling decisions, which have got already impacted marketplace prices. Once everyone is bullish in addition to long, prices are liable to top out because at that spot is no ane left to buy. Consequently, exactly about other payoff of owning stocks that endure from the 'ick' constituent is that they are frequently heavily under-owned, in addition to hence have got relatively few potential sellers left. This way the stocks are frequently (but non always) comparatively resilient to negative news.
Lots of value investors similar to bottom-fish in addition to purchase stocks that are or have got late fallen sharply. I practise that also sometimes, but I prefer to purchase something that has non exclusively already dropped a long way, but which has also already 'bounced along the bottom' for an extended catamenia of fourth dimension on depression volume. This procedure tends to steadily sift-out all the weak/impatient holders, piece stock is tardily accumulated yesteryear strong hands - unremarkably hard-core contrarian, longer-term holders similar myself. Particularly bullish is when such stocks neglect to elicit much reaction to bad news, in addition to a rattling strong purchase signal comes when such companies present early on signs of positive cardinal change.
Ambac
One possible illustration of an 'ick factor' stock at the 2nd is bond insurer Ambac (AMBC US). (This is far from the best example, but I exactly occur to have got been researching the stock this weekend in addition to felt similar writing close it; much ameliorate examples hail from Hellenic Republic in addition to Russia, where I've made a tonne of coin inwards the yesteryear twain of years, every bit good every bit mining & mining services inwards early on 2016). The stock's electrical current marketplace capitalization is close US$900m.
There are few stocks that investors every bit instinctively recoil from every bit bond insurers - especially bond insurers that went bankrupt during the global fiscal crisis underwriting securized mortgages that defaulted inwards large numbers (the companionship was restructured, emerged from bankruptcy in addition to re-listed inwards 2013). Hence, at that spot is potential chance hither worth investigating.
The Holding companionship distinction
The starting fourth dimension betoken to emphasise when looking at Ambac is that what you lot are buying is truly a holding company called Ambac Financial Corp (AFC), not the bond insurance operating companionship Ambac Assurance (AAC). The latter is exactly a wholly-owned subsidiary of AFC, in addition to it is this entity that houses all of the Ambac Group's fiscal guarantee obligations.
This is non a trivial distinction, because it is AAC not AFC that is regulated; is required to hold a certainly amount of regulatory capital; in addition to which is dependent land to the risks its US$70bn inwards outstanding bond guarantees represent. AFC is non obligated to position to a greater extent than coin into AAC if its reserves prove inadequate to encompass bond insurance losses, due to typical limited legal liability in addition to an absence of cross-company guarantees from the belongings company. Consequently, the minimum value of AAC to AFC is zero, which is rattling of import because it caps the size of AFC's potential losses.
The belongings companionship currently has 3 key sources of value. Firstly, it has cash in addition to investments of US$347m (as at 1Q17). In addition, it has entered into clever tolling agreements with AAC regarding the utilization of revenue enhancement losses that the companionship expects volition allow it to upstream an additional US$165m inwards cash inwards the adjacent few years from AAC without regulatory blessing (AAC needs blessing for all distributions/dividends to ensure it has sufficient claims-paying resources to come across hereafter obligations, inwards the eyes of regulators). If in addition to when these additional tolling payments are received, the belongings companionship volition have got close US$500m of cash & investments.
Secondly, AFC has US$1.4bn of revenue enhancement loss ship forwards (separate to the US$2.6bn that be inwards AAC - both of which are off-balance-sheet), which expire during 2029-33. Based on the US electrical current revenue enhancement charge per unit of measurement of 35%, if fully utilized, these US$1.4bn inwards revenue enhancement loss ship forwards would last worth US$490m (gross, undiscounted), in addition to AMBC management has said it is investing diverse commercial transactions which would allow these NoLs to last utilised.
The NoLs are worth considerably less than US$490m. Firstly, whatever reduction inwards US corporate revenue enhancement rates volition cut their value, in addition to such a reduction is currently nether discussion. If nosotros assume revenue enhancement rates are reduced to 25%, this volition cut their gross value to US$350m. In addition, farther discounts are needed for (1) the jeopardy that they volition non last fully utilized prior to expiration, in addition to (2) for the fourth dimension value of money. However, fifty-fifty if nosotros adopt a conservative approach in addition to convey a 50% discount for both (i.e. a 75% cumulative discount), these NoLs would last worth a piddling nether US$100m. Together with the cash in addition to investments above, this would value the belongings companionship at US$600m, or close US$12/share, excluding AAC. Meanwhile, the shares late changed hands at US$17/share (although have got popped inwards the in conclusion few days to US$20/share).
The inwards a higher house is of import because it reduces the downside jeopardy yesteryear two-thirds. Most investors probable assume that the downside is to cipher if a bunch of AMBC's insured bonds blow upwardly in addition to wipe out the bond insurance company's equity, but that is non the case. The powerfulness of this ex-AAC belongings companionship value to reducing the potential downside yesteryear two-thirds, piece investors soundless have got total exposure to the AAC upside, is a rattling of import valuation nuance that is lost on many observers.
Including the value of AAC
The tertiary in addition to in conclusion origin of value to AMBC is the option value embedded inwards the eventual value of its wholly owned subsidiary AAC, which houses all of the group's fiscal guarantees in addition to the bulk of the group's working capital alphabetic lineament in addition to investments.
The value is potentially significant. Indeed, later AMBC's late announced negotiated short town with creditors of its rehabilitated segregated account, the company's consolidated adjusted bulk value volition rising to close US$40/share, or close US$30/share excluding the cash to last held at the belongings companionship flat every bit previously discussed. Furthermore, using the same methodology every bit above, AAC also has an additional US$160m worth of deferred revenue enhancement assets (US$2.4bn inwards gross NoLs) that are off residual sheet, or close exactly about other US$3/share.
In other words, including off-balance-sheet DTAs, AAC's adjusted bulk value is worth close US$33/share, in addition to with the AFC belongings companionship worth an estimated US$12/share excluding AAC, this implies a total valuation of close US$45/share. Meanwhile, the stock is currently trading at close US$20/share.
What is AAC probable to ultimately last worth? I don't know. But at US$20/share, the marketplace is implying that AAC is worth exclusively US$8, or close 26-27% of adjusted bulk value, in addition to close 24% of adjusted bulk value including the value of its deferred revenue enhancement assets. Let's telephone band it a circular 25%. The marketplace is so effectively maxim at that spot is a 75% jeopardy AAC is worth zero, in addition to exclusively 25% jeopardy the assets are worth adjusted book.
That appears much also pessimistic. The companionship is currently inwards run-off way (i.e. is non writing whatever business), in addition to has delevered since emerging from bankruptcy inwards 2013 from at 35:1 ratio of insured obligations to claims paying resources, to exactly 13:1 at present. It's total insured par has shrunk from a summit of US$550bn instantly prior to the GFC, to exactly US$70bn today.
This run-off in addition to deleveraging dynamic is important, because every bit the company's leverage declines, the companionship volition liberate regulatory capital, in addition to this working capital alphabetic lineament volition so conk available to upstream to the belongings companionship level, in addition to last used to buy-back shares - something that would last rattling accretive at the electrical current portion price. In addition, the risks attached to the company's adjusted bulk value reject every bit leverage declines, which should also lessen the discount the marketplace is applying.
Most of AMBC's remaining exposure is US municipal obligations, with its structured finance in addition to existent estate exposure having been significantly reduced. With existent estate prices rising in addition to the US economic scheme doing quite well, most of AMBC's remaining run-off exposures are inwards expert wellness at present, with the notable exception of Puerto Rico (see below). In addition, the companionship has been having success with R&W (representation in addition to warranty) litigation against the large banks for simulated representations made yesteryear the banks to Ambac on pre-GFC-era existent estate securitisation guarantees made (as a series banking concern shareholder, it is prissy to ain a stock on the other side of the litigation divide!) The companionship has already included an approximate of hereafter litigation settlements on residual sheet, but nosotros believe those estimates are probable to last on the conservative side, which creates additional upside risks to adjusted bulk value inwards coming years.
Puerto Rico
Puerto Rico's troubled finances have got been inwards in addition to out of the fiscal press, in addition to significantly pressured the portion prices of all the major US municipal bond insurers before this year. AAC has US$2bn of par exposure, but has already reserved for a one-third loss, which appears sufficiently conservative (i.e. they could restructure with PR to cut the human face upwardly value of outstanding bonds yesteryear 1/3rd in addition to this would non comport upon cyberspace bulk value). The US$1.3bn of unreserved exposure represents close US$26/share, in addition to US$20/share cyberspace of available revenue enhancement deductions (which may or may non last utilizable). At US$20/share the marketplace has already written downward AMBC's US$45 adjusted bulk value including DTA assets to a flat that assumes a 100% PR loss which seems highly unlikely.
Indeed, ane of the genuine sources of value bond insurers provide is their powerfulness to renegotiate work loans inwards society to mitigate potential losses, every bit good every bit engage inwards litigation where necessary, which is something most bond investors are abhor (or simply unable) to do. In addition, the companionship is sometimes able to purchase the bonds it has insured inwards the secondary marketplace at sudden discounts to par for loss mitigation purposes (if the bonds default, they pay out less than 100c inwards the dollar every bit they have got bought them on the secondary marketplace at a discount, in addition to if the loans are successfully worked out, they merchandise dorsum upwardly to par in addition to AMBC is able to sell out at a profit). Much of the company's PR insured exposure is also non to full general obligation bonds, but to specific revenue bonds (which entail claims against specific infrastructure assets, for example, or sales revenue enhancement income streams), which - provided the dominion of police clit is upheld - cannot last simply repudiated yesteryear PR (which they have got attempted to do; they are existence taken to courtroom yesteryear bondholders). It is likely, on an expectancy basis, that AAC is adequately reserved for its PR exposure at this betoken inwards my view.
Conclusion
All told, AMBC looks similar an interesting value long. It is the form out of situation, however, where you lot cannot have got 'high conviction' inwards the outcome - exclusively high conviction that the risk/reward is attractive - in addition to so it makes sense to adopt a basketed approach. I currently have got a 30bp seat inwards AMBC, 15bp inwards MBI, 80bp inwards AGO; or an aggregate sector exposure of slightly to a greater extent than than 1%. I also have got a 65bp seat inwards GNW, which has exactly about mortgage bond-insurance operations (which I'm uncomfortable with to last honest), but this is to a greater extent than of a merger-arbitrage play with a deep-value value backing if the bargain falls through, than a monoline play).
LT3000
*Incidentally, I am a huge fan of Bill Miller, in addition to Bill Miller has been an obvious casualty of this career jeopardy asymmetry. Despite beating the S&P 500 for xv consecutive years upwardly until the GFC; five consecutive years over again recently; in addition to beating the marketplace throughout the 1999-2017 catamenia cumulatively (i.e. including the GFC losses) by 200-300bp - all-time hall-of-fame type numbers - he is widely regarded every bit existence a reckless & failed investor because he fared rattling poorly during the GFC betting on bombed-out financials that went to zero. It was a risky bet, to last sure, in addition to ane that inwards hindsight was mistaken, but it is seldom considered that had Lehman had non been allowed to neglect in addition to had other US institutions non been dependent land to forced nationalizations, he would probable have got made an absolute fortune. We volition never know what the truthful ex ante probabilities were.
Bill Miller is proof of Keynes' admonition that 'it is ameliorate for reputation to neglect conventionally than to succeed unconventionally'
The inwards a higher house analysis is furnished for informational/entertainment purposes only, in addition to is non to last construed every bit investment advice. The writer provides no warranty whatsoever every bit to the accuracy of the contents of the post, in addition to reserves all rights to merchandise inwards whatever securities mentioned inwards whatever article at whatever time.