Ambac bonds drop on Puerto Rico fears; OSG higher; Harrisburg up after payment miss

By Paul Deckelman

New York, Sept. 11 - Ambac Financial Group Inc.'s bonds tumbled "4 or 5 points" on Wednesday, a trader said, in line with a fall in the bond insurance company's shares, amid investor worry that the company may have too much exposure to Puerto Rico's debt and that of other struggling municipal bond issuers.

Meanwhile, one of those issuers whose debt is in fact insured by Ambac - the struggling city of Harrisburg, Pa. - announced that it would skip the scheduled Sept. 15 interest payments on two series of bonds in order to conserve cash. The Pennsylvania capital's bonds were quoted higher after the news.

Elsewhere, Overseas Shipholding Group Inc.'s bonds were seen trading 1 or 2 points higher, though on not much volume.

In the broader market, bonds of underachieving retailers RadioShack Corp. and Sears Holdings Corp. were firmer on the session.

Ambac trades off

A trader said that Ambac Assurance Corp.'s 5.10% notes due 2020 "dropped about 5 points" down to the 85 to 87 range, after having traded around a 90 to 91 context on Tuesday.

"They opened up this morning around 89-90, and then the notes were active, right around 85."

He did not have a volume figure but said that "it must have been active," since he had seen all kinds of quotes on the way down to 85-87, "so they probably had a good trading day."

Its Nasdaq-traded shares meantime dropped by $1, or 5.05%, to end at $18.82, on volume of over 3 million, some six times the norm.

The trader cited a news report indicating that investors were getting worried about the bond insurance company's exposure to municipal debt in Puerto Rico, where the company, a subsidiary of New York-based Ambac Financial Group, insured over $2.5 billion of paper as of earlier this year, according to regulatory filings.

Besides its exposure in economically struggling Puerto Rico, the investors are said to be worried about Ambac's exposure to other municipal issuers that have run into trouble, including Detroit, where Ambac guarantees some $170 million of debt.

Harrisburg up amid payment news

Another Ambac client is the city of Harrisburg, Pa. - which announced on Wednesday that it plans to skip the scheduled Sept. 15 interest payment on two series of bonds in order to conserve cash.

Its paper rose despite that negative news.

Harrisburg general obligation bonds maturing in March of 2016 were seen by a market source to have moved up to around the 83¾ bid level from Tuesday levels around 801/2, although on very light trading.

Those bonds had traded just under 85 bid last month.

Its busiest bond, in relative terms was the general obligation bonds due in March 2017, although even there activity consisted of just a handful of smallish trades. The bonds moved above 78½ bid from Tuesday's levels at 76. Showing the volatile nature of the paper, they had been anchored around 74 bid earlier in the month, but had hovered just below 83 bid throughout May.

Harrisburg's G.O. bonds due in September of 2019 moved up to 63 5/8 bid from prior levels around 61 1/8. There had not been much trading in the credit, but earlier in the year, it gyrated between 58 and 63 bid.

Overseas Shipholding more buoyant

A trader said that the bonds of Overseas Shipholding Group "jumped a point or two," although he said that there was not a lot of volume in the issue.

He saw the bankrupt New York-based tanker operator's 8 1/8% notes due 2018 trading in a 90 to 90½ bid context, which he called a gain of 1½ points from where they were previously.

He said that volume in the issue amounted to "just a couple of trades, maybe $3 or $4 million.

"But that showed some life."

A news report on Wednesday indicated that a federal judge had tossed out shareholder claims that several of the company's former executives, including Morten Arntzen, who resigned as president and chief executive officer in February, and Myles Itkin, who was the executive vice president and chief financial officer until April, had lied to them about the state of the company's finances.

The New York court also found that the former executives had not sold OSG stock before the company's shares tumbled last fall on revelations of its severe tax problems.

OSG recently completed restatements of its financial reports going back as far as a dozen years, and said that it was now prepared to sit down and negotiate with the Internal Revenue Service over the government's claims that the tanker company owes some $463 million in back taxes, interest and penalties.

OSG acknowledged at that time that the resulting tax bite could be "substantial," perhaps even coming up to $460 million - essentially all of the federal claim.

Retailers show strength

A trader said that RadioShack's bonds "were trading up a little bit."

He saw the underperforming Fort Worth, Texas-based electronics retailer's 6¾% notes due 2019 "trading with a 77 handle, which is up a couple of points, but not a lot of volume."

A second trader also quoted those bonds just over the 77 bid mark but estimated mid-afternoon volume approaching $6 million.

The first trader said that Sears Holdings' bonds "are another one that's been moving higher."

He pegged the Hoffman Estates, Ill.-based department store operator's 6 5/8% notes due 2018, calling that up another point on the session.

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