Ambac might file for bankruptcy protection this year

Ambac Financial Group Inc., which was the second-largest U.S. bond insurer before suffering huge losses on risky mortgages, said it may file for bankruptcy protection as soon as this year after skipping a bond interest payment.

The announcement is the latest setback for Ambac, which has struggled to stay solvent after the housing market collapse. Ambac had pursued higher profit by expanding beyond municipal bond insurance and starting to insure riskier debt. That move backfired as credit tightened and more borrowers defaulted.

In a regulatory filing, Ambac said it had been unable to raise capital to avoid bankruptcy and was in talks with a group of senior bondholders to pursue a bankruptcy filing that would preserve a $7-billion tax benefit.

Ambac said that if it cannot agree on a “prepackaged” bankruptcy in the near term, it intends to seek Chapter 11 protection this year, perhaps without the support of creditors. It said this would cause $1.62 billion of debt to be payable immediately.

The New York company previously said that it might seek a prepackaged bankruptcy but that its liquidity might not run out until the first quarter of 2011. Failure to win creditor support could result in a lengthy reorganization.

“Ambac has been a corpse for some time,” said Matt Fabian, managing director of Municipal Market Advisors, an independent research firm. “With the credit crisis ongoing and getting worse, it will make any kind of bankruptcy restructuring more difficult, and painful for creditors. The bankruptcy process appears to be going faster than investors expected.”

Larger rival MBIA Inc. and Ambac had been the largest bond insurers before losses on risky debt, including mortgages, caused them in 2008 to lose the triple-A credit ratings on which they depended to insure debt in the $2.7-trillion municipal bond market.

Ambac decided not to make a $2.8-million payment due Monday on its $75 million of 7.5% bonds maturing in May 2023. It said it will be in default if it fails to pay within 30 days and bondholders may demand that it repay all principal.

The next interest payment on Ambac debt is due Nov. 15.

“We are actively working with an ad hoc committee of senior bondholders” toward a prepackaged bankruptcy, Ambac spokesman Peter Poillon said Monday.