PR Newswire
LOS ANGELES, April 28, 2016
LOS ANGELES, April 28, 2016 /PRNewswire/ -- Canyon Capital Advisors LLC ("Canyon Capital"), a leading alternative asset manager serving institutional clients worldwide, and manager of funds and accounts that own almost 5% of the outstanding shares of Ambac Financial Group, Inc. (Nasdaq: AMBC) ("Ambac" or the "Company"), announced this week that it has filed definitive proxy materials with the Securities and Exchange Commission in connection with Ambac's upcoming 2016 Annual Meeting of Stockholders, to be held on May 18, 2016, and has delivered a letter to the stockholders of Ambac.
Canyon is urging stockholders to elect Mr. Frederick Arnold, a highly-qualified nominee, to serve on the Company's board of directors at the upcoming 2016 Annual Meeting.
The full text of the letter follows:
April 28, 2016
Dear Fellow Ambac Stockholder:
Canyon Capital Advisors LLC (together with certain of its affiliates, "Canyon") is the investment advisor to funds and accounts that beneficially own over 2.2 million shares, or almost 5%, of the outstanding common stock of Ambac Financial Group, Inc. ("Ambac" or the "Company").
Over the past several months, we have publicly expressed our significant ongoing concerns with the Company's trajectory, and our belief that further change in the boardroom is needed to prevent continuing destruction of stockholder value.
Recently, we filed definitive proxy materials in connection with the Company's 2016 Annual Meeting of Stockholders, scheduled for May 18, 2016, to (1) elect to the Board Mr. Frederick Arnold, a highly qualified and experienced director who is independent of both Canyon and the Company, to replace Jeffrey S. Stein, and (2) disapprove the compensation of the Company's named executive officers. You can find copies of our proxy materials at the following link: http://www.AmbacStockholderRights.com.
The need for a truly independent, stockholder-proposed director to replace Mr. Stein on the Board is clear:
Canyon requests your support in its efforts to provide Ambac with a more balanced Board capable of legitimately assessing the Company's direction and increasing stockholder value.
Please give us your GOLD proxy card voting "FOR" Mr. Arnold and the Company's candidates for election at the Annual Meeting other than Jeffrey S. Stein, and "AGAINST" Ambac's proposal to approve compensation of the Company's named executive officers.
The Board Under Mr. Stein Has Failed To Guide Ambac's Performance and Has Allowed Management to Mislead Ambac's Stockholders
A board of directors is supposed to oversee a company's strategy and its management. The Board under Mr. Stein has failed in both respects, putting its head in the sand as Ambac has spiraled downward and its management has misled stockholders.
Under Mr. Stein's leadership as Ambac's Chairman, the Company's stock price has fallen dramatically. Despite that, the Stein-led Board rewarded interim CEO Tavakoli with a permanent position and lucrative pay package.
Further, as Chairman of the Board, Mr. Stein failed to hold management accountable for its poor performance. He has also stood by while management has made misleading statements to stockholders, including those in defense of the Company's lamentable track record.
Misleading statements by the Company under Mr. Stein's inattentive leadership as Ambac's Chairman include:
Ambac needs a board that will independently assure its management's integrity and the wisdom of its actions; the Board under Mr. Stein has failed to provide this oversight.
Unlike Mr. Stein, Mr. Arnold will not bury his head in the sand and ignore red flags like these.
Ambac's Poor Performance
When faced with criticism over the Company's performance under current leadership, Ambac tells you how well it has done since emerging from bankruptcy in 2013. That is irrelevant. What matters is what happened since Messrs. Stein and Tavakoli took over.
Management claims to have achieved $25 of operating earnings per share in 2015. But that is plainly a distortion and the 2015 stock price drop from $24.50 to $14.09 indicates the market agrees.
The Company also touts its success in cutting costs, but the numbers do not lie and Ambac's expenses have actually increased under Mr. Stein and Mr. Tavakoli.
Photo - http://photos.prnewswire.com/prnh/20160428/361413
There is also no basis for other accomplishments Ambac's management would like you to believe.
— $194 million is attributable to the B- rated bonds that were low risk and included in the $382 million described above.
— $254 million was purchased in 2014 under Mr. Tavakoli's predecessor and was merely unwrapped during his tenure.
— Based on CUSIP numbers, it appears another $100 million or so was commuted well before Mr. Tavakoli became interim CEO.
— $225 million was purchased in February 2016 only after Canyon's urging.
— The 2013 judgment in favor of Assured Guaranty against Flagstar for approximately 118% of the incurred losses;[3]
— The 2013 settlement between MBIA and Flagstar for approximately 67% of the incurred losses;[4]
— The 2014 settlement between Syncora and JP Morgan, which appears to be somewhere between 66-86% of the incurred losses.[5]
— While these precedents all have slightly unique characteristics (e.g. component of future losses), the big picture clearly indicates that Ambac's settlement with JP Morgan was nothing remarkable.
Ambac's Leadership is Over-Compensated
There is no legitimate justification for the Board, under Mr. Stein's leadership, to have approved Mr. Tavakoli's extraordinarily high compensation, especially given the Company's poor performance while he was interim CEO.[6]
On his appointment as Ambac's permanent President and CEO in January 2016, the Board awarded Mr. Tavakoli an additional cash bonus for 2015 – a year in which Ambac's stock price declined by 42.9%.
Under the pay packages awarded by the Board, Mr. Tavakoli could earn approximately $40 million (subject to the satisfaction of certain performance goals and further vesting in 2019 and 2020) even if he merely restores Ambac's stock price to the level it was when he became interim CEO.
Ambac's assertions that Mr. Tavakoli could only reach $33 million at maximum levels does not take into account post-grant stock price appreciation. Such appreciation should indeed be treated as compensation, as is reflected by the fact that it would be taxed as ordinary compensation income and would be reported as compensation income for proxy reporting purposes.
Ambac's further assertion that the stock price would need to increase to $50.70 for Mr. Tavakoli to reach maximum compensation appears to be based on pure speculation. Ambac's Compensation Committee has yet to set the goals governing Mr. Tavakoli's future performance-based stock grants or, if those determinations have been made, has yet to disclose them to stockholders publicly.
Although 2016 information is not yet publicly available for the Company as a whole, Mr. Tavakoli's target and maximum compensation in 2016 would equal at least 11% and 18% respectively of the Company's total 2015 compensation expense. These are remarkable numbers.
Mr. Tavakoli's target pay is over 3 times that of his predecessor. And unlike his predecessor, Mr. Tavakoli is not even required to work full time for the Company.
Ambac suggests that a December 2014 communication from Canyon expressing support for Mr. Tavakoli upon his appointment as interim CEO undermines our present concerns with the Company's leadership. That makes no sense.
As to Mr. Stein and other members of the Board, in spite of the Company's struggles, Ambac paid its full-year Board members on average over $189,000 more than the compensation paid to the 90th percentile of full-year board members at the companies Ambac itself has identified as its peers for compensation purposes ("Ambac's Chosen Peers").
For 2015, the compensation for each full-year member of the Board was $475,004. By comparison, the median compensation for the 126 full-year board members of Ambac's Chosen Peers is approximately $174,500 – over $300,000 less than what each Ambac Board member takes home.
In fact, only one board member in Ambac's Chosen Peers receives more than each of Ambac's board members – the long-term non-executive Chairman of Radian Group Inc., a much larger company than Ambac that still has active business.
Given their extraordinary compensation, when management and the Board advocate to keep the Company going through speculative, non-core business pursuits, ask yourself who those plans are intended to benefit and who is really conflicted.
We Are Trying to Further Improve Ambac's Corporate Governance
Ambac asks you to consider that its slate of nominees has received public backing from other stockholders. But nearly all of the stockholder support to which Ambac refers is from stockholders who are contractually bound to support that slate.
After extensive criticism from Canyon and its announced intent to nominate three independent directors, other stockholders also pressed for changes in the Board. Ultimately, on March 28, 2016, the Company announced agreements to replace two of Ambac's directors with nominees approved by certain stockholders.
As a result, those stockholders are now required to support Ambac's slate. You and Canyon are not.
Our decision to no longer pursue three nominees is not a "failed initial campaign" as Ambac claims. To the contrary, it is an attempt to build constructively on the work our fellow stockholders have done.
We commend them for successfully getting one stockholder-proposed director on the Board, but one is not enough. Replacing Mr. Stein with a truly independent stockholder advocate will be a very significant improvement.
Ambac Needs a More Balanced Board That Will Honestly Consider Change Rather Than Burying Its Head in the Sand
Canyon has been highly critical of Mr. Tavakoli, but we are not asking stockholders to remove him as a director at this point. We recognize the complications of doing that while he continues to serve as President and CEO.
Nor is Canyon looking to transform Ambac overnight.
We want to replace Mr. Stein to achieve a more balanced Board that can more fairly consider a departure from the Company's failed policies and the bona fides of Mr. Tavakoli's leadership.
Of the six directors on the Company's slate:
Mr. Stein has presided as Chairman over the Board during the entirety of Mr. Tavakoli's disastrous tenure as President and CEO and the loss of over 30% of Ambac's equity value that stockholders have witnessed in that time.
Ambac notes it has long-term obligations, and attempts to suggest that Canyon is proposing an irresponsible, immediate liquidation. That is a straw man. Our point is simply that Ambac could be doing much more to address its outstanding liabilities than it is doing now.
As Ambac itself acknowledges, there is also a natural check on the rate at which that will be done: the regulator overseeing the Segregated Account of Ambac Assurance Corporation (the "Segregated Account").
Fred Arnold is not going to instantly reverse Ambac's failed course. But he can help work for responsible change over time through building consensus and taking considered actions.
Canyon Is Not "Conflicted"
Ambac wants you to believe that Canyon is "conflicted" because we also own Ambac Assurance policies. Do not be fooled.
Canyon never had any disagreement with Ambac over reducing policy liabilities. Our concern, and the reason for our proxy challenge, has always been Mr. Tavakoli's lack of candor, competence and integrity.
Canyon is one of Ambac's largest stockholders, holding nearly 5% of Ambac's equity. Ambac's response that there are other stockholders with substantial holdings too is totally irrelevant.
Canyon's policy holdings only mean we are even more invested in Ambac, and have that much more stake in its proper management. It is not uncommon for investors to own securities throughout the capital structure of a company.
All stockholders have a strong interest in ensuring Ambac properly manages its liabilities so they do not erode equity value and defer return of capital.
Given that the regulator concluded that policy claims likely will be paid at par plus accrued interest, any expectation that Ambac will be able to buyback or commute the policy claims at a substantial discount would be delusional.
Because of Canyon's significant equity position, and the fact that any discount management achieves on policies is not likely to be substantial, the notion that Canyon is actually conflicted in advocating liability management is absurd.
Equally absurd is the claim that Canyon is launching a proxy contest to improve the rate of return on claims that, based on expected future losses and recoveries, will achieve par anyway according to the regulator with responsibility for their payment.
A more appropriate way to understand Canyon's stock and debt investments in Ambac is to express them as a percentage of the company's reserves.
Although Ambac continually refers to a long-term plan for asset-liability management, it has never clearly articulated what that plan is or any plan for returning capital to stockholders.
The real conflict is between stockholders and entrenched management: Ambac's management and the Board have a clear conflict in that as policies continue to run-off – which should be substantial by the end of 2017 – so does their exorbitantly-compensated time at the helm.
The recent agitation by other stockholders that resulted in the appointment of two new Board members reflects that other stockholders, not just Canyon, are concerned.
Management's Lack of Candor
Mr. Tavakoli's tenure has been marked by one unsubstantiated assertion after another of which Mr. Stein was fully aware but did nothing to prevent or correct.
Public – During an interview aired on CNBC on January 24, 2016, Mr. Tavakoli said "we're not aware of any shareholders calling for my ouster."[7]
Private – In a March 14, 2016 letter to Canyon, Ambac denied that an investor who called in to Ambac's 3Q2015 earnings call to express support for Mr. Tavakoli headed a company at the time a fund managed by Mr. Tavakoli had been a large stockholder.
Manufactured – In an April 11, 2016 press release, Ambac suggested that Canyon had attempted to "greenmail" the Company because a broker purportedly offered to sell Canyon's publicly disclosed securities to Ambac.
Ambac IS in Liquidation and Needs to Do More to Return Capital to Stockholders
Unbelievably, in its own letter to stockholders and in a slide deck, Ambac is now denying that it is in liquidation. Instead, it is telling stockholders that it intends "eventually" to have Ambac Assurance continue "as a viable and strong Company." That is insane.
Ambac also has made comments over the last several months about starting amorphous, speculative new businesses having nothing to do with its core insurance operations:
"This October we introduced a pilot program to invest in residential real estate owned properties within Ambac insured transactions. The main component of the value creation of this project will be the result of making repairs to the REO properties in order to bring them up to neighborhood standards."[8]
"[W]e're giving substantial thought to deploying our capital strategically in asset management businesses."[9]
Who is Ambac kidding? Ambac is playing with your money, and its CEO and Board are drawing down exorbitant compensation while it does so.
Ambac's own management and auditors concluded that there is "substantial doubt about Ambac's ability to continue as a going concern."[10] Management should wind Ambac down, return your money, and move on.
Ambac's failure to address its outstanding liabilities is hurting equity holders
Ambac says its long-term yield on investible assets in 3Q2015 was 5.93%.[11] We think that is overstated:
Excluding the notional yield on Ambac's own policies and including short-term investments, Ambac's investment portfolio returned only 2.78% in Q32015, less than half of the 5.93% claimed by Ambac.
Ambac's Efforts to Address its Liabilities Have Been Woefully Inadequate
We believe Ambac is holding over $2 billion of excess capital, which grows monthly as insured bond exposure rolls off and non-cash assets are realized.
Ambac has shown no urgency in deploying its excess capital. Management has touted its $635 million of insured securities buybacks in 2015, but its actions have been reactive and subscale.
In fact, Ambac failed to engage in any material value-creating commutations in 2015. Very little risky exposure was commuted.
Ambac paid up to 91+ cents on the dollar for these claims, and could have paid less had it bought at a more opportunistic time.
Due to natural run-off of insured exposures and improvement in credit over time, surplus notes have continued to increase in price and will continue to appreciate as credit heals.
Photo - http://photos.prnewswire.com/prnh/20160428/361414
Under Messrs. Tavakoli's and Stein's leadership, Ambac did not begin commuting risky loan exposures until February 2016, following Canyon's continued urging and threat of a proxy contest.
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