LONG-TERM DEBT

The carrying value of long-term debt was as follows:



	December 31,
	2014		2013
Ambac Assurance:
5.1% surplus notes, general account, due 2020	$	696,330	$	909,186
5.1% surplus notes, segregated account, due 2020	30,479		39,797
5.1% junior surplus notes, segregated account, due 2020	244,307		14,195
Ambac Assurance long-term debt	$	971,116	$	963,178

Variable Interest Entities long-term debt	$	12,882,076	$	14,091,753

Surplus Notes, General Account

Ambac Assurance surplus notes, with a par amount of $893,300 and $1,210,821 at December 31, 2014 and 2013, respectively, are reported in long-term debt on the Consolidated Balance Sheet and have a scheduled maturity of June 7, 2020. These surplus notes were issued in connection with the Settlement Agreement and were recorded at their fair value at the date of issuance. Since issuance, Predecessor Ambac had accreted the discount into earnings using the effective interest method, based on an imputed interest rate of 53.9% at the date of issuance. The carrying values of these surplus notes were adjusted to fair value as of the Fresh Start Reporting Date. Subsequent to the Fresh Start Reporting Date, Successor Ambac has accreted the discount based on an imputed interest rate of 10.5%. All payments of principal and interest on the Ambac Assurance surplus notes are subject to the prior approval of the OCI. If the OCI does not approve the payment of interest on the Ambac Assurance surplus notes, such interest will accrue and compound annually until paid. OCI disapproved the requests of Ambac Assurance to pay interest on the outstanding Ambac Assurance surplus notes on their respective scheduled interest payment dates since their issuance.

At the time of issuance of the general account surplus notes, Ambac Assurance entered into call option agreements to repurchase, at significant discounts to par, such surplus notes with an aggregate par amount of $939,179. Certain of these call options were free-standing derivatives for accounting purposes and were carried at fair value as assets on the Consolidated Balance Sheets. In June 2012, Ambac Assurance exercised certain of these options and repurchased surplus notes with total par value of $789,179 for an aggregate cash payment of $188,446 pursuant to such call option agreements. The acquisition of surplus notes pursuant to such call option agreements had been approved by OCI and by the Rehabilitator, whose approval was conditioned upon the approval by the Rehabilitation Court, which was granted on June 4, 2012. Ambac Assurance had sought approval from OCI and the Rehabilitator to repurchase an additional $150,000 of Ambac Assurance surplus notes pursuant to a third call option agreement entered into with respect to such surplus notes, but OCI and the Rehabilitator declined to approve the repurchase. The carrying value of extinguished surplus notes and accrued interest less the fair value of the free-standing derivatives were below the call option exercise prices and, accordingly, for the year ended December 31, 2012, Ambac recognized a realized loss of $177,745. The remaining options to acquire surplus notes have expired.

Surplus Notes, Segregated Account

The Segregated Account surplus notes, with a par amount of $39,102 and $53,000 at December 31, 2014 and 2013, respectively, are reported in long-term debt on the Consolidated Balance Sheets and have a scheduled maturity of June 7, 2020. These surplus notes were recorded at their fair value at the date of issuance. Since issuance, Predecessor Ambac had accreted the discount into earnings using the effective interest method, based on an imputed interest rate of 52.8% at the date of issuance. The carrying values of these surplus notes were adjusted to estimated fair value as of the Fresh Start Reporting Date. Subsequent to the Fresh Start Reporting Date, Successor Ambac has accreted the discount based on an imputed interest rate of 10.5%. All payments of principal and interest on the Segregated Account surplus notes are subject to the prior approval of the OCI. If the OCI does not approve the payment of interest on the Segregated Account surplus notes, such interest will accrue and compound annually until paid. OCI disapproved of the requests of the Rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, to pay interest on the outstanding Segregated Account surplus notes on their respective scheduled interest payment dates since their issuance.

As described in Note 1. Background and Business Description, the Rehabilitator redeemed certain Segregated Account surplus notes (other than junior surplus notes) on November 20, 2014 at a redemption price that included an amount equal to accrued interest on such redeemed surplus notes. Such redemption also triggered similar proportionate redemption payments on Ambac Assurance surplus notes. The redemption of surplus notes resulted in a charge representing the accelerated recognition of the unamortized discount on the redeemed surplus notes. The unamortized discount on the redeemed portion of Segregated Account and Ambac Assurance surplus notes were $3,134 and $71,590, respectively, and recognized in Net realized losses on extinguishment of debt of the Consolidated Statements of Total Comprehensive Income (Loss).

Junior Surplus Notes, Segregated Account

The Segregated Account junior surplus notes, with a par value of $378,039 and $28,039 at December 31, 2014 and 2013, respectively, are reported in long-term debt on the Consolidated Balance Sheets and have a scheduled maturity of June 7, 2020, subject to restrictions described below. Par value at December 31, 2014 and 2013 includes $28,039 of junior surplus notes issued in connection with a settlement agreement (the “OSS Settlement Agreement”) entered into among Ambac, Ambac Assurance, the Segregated Account and One State Street, LLC (“OSS”) with respect to the termination of Ambac’s office lease with OSS. The outstanding principal amount of one such note issued to OSS shall, according to its terms, be reduced based on any rents paid after the initial term of the lease entered into between OSS and Ambac Assurance as part of such settlement. These junior surplus notes were recorded at their fair value at the dates of issuance. Since issuance, Predecessor Ambac had accreted the discount into earnings using the effective interest method, based on an imputed interest rate of 58.3% at the date of issuance. The carrying values of these surplus notes were adjusted to estimated fair value as of the Fresh Start Reporting Date. Subsequent to the Fresh Start Reporting Date, Successor Ambac has accreted the discount based on an imputed interest rate of 19.5%. Par value at December 31, 2014 includes $350,000 face amount of a junior surplus note originally issued to Ambac pursuant to Ambac's Reorganization Plan in accordance with the Mediation Agreement and that Ambac sold to a newly formed Trust on August 28, 2014 (as further described in Note 1. Background and Business Description). This note was recorded at a discount to par based on its fair value on August 28, 2014. Ambac is accreting the discount on this junior surplus note into earnings using the effective interest method, based on an imputed interest rate of 8.4%. Principal and interest payments on Segregated Account junior surplus notes cannot be made until all Ambac Assurance and Segregated Account surplus notes are paid in full and after all Segregated Account future and existing senior indebtedness, policy and other priority claims have been paid in full. All payments of principal and interest on the junior surplus notes are subject to the prior approval of the OCI. If the OCI does not approve the payment of interest on the junior surplus notes, such interest will accrue and compound annually until paid. No such approval has been sought or obtained to pay interest on junior surplus notes since their issuance.

Variable Interest Entities, Long-term Debt

The variable interest entity notes were issued by consolidated VIEs. Generally, Ambac is the primary beneficiary of the VIEs as a result of providing financial guarantees on the variable interest notes. Consequently, Ambac has consolidated these variable interest entity notes and all other assets and liabilities of the VIEs. Ambac is not primarily liable for the debt obligations of these entities. Ambac would only be required to make payments on these debt obligations in the event that the issuer defaults on any principal or interest due. The total unpaid principal amount of outstanding long-term debt associated with VIEs consolidated as a result of the financial guarantee provided by Ambac was $11,925,499 and $14,251,771 as of December 31, 2014 and 2013, respectively. The range of final maturity dates of the outstanding long-term debt associated with these VIEs is March 2015 to December 2047 as of December 31, 2014, and February 2015 to December 2047 as of December 31, 2013. As of December 31, 2014 and 2013, the interest rates on these VIEs’ long-term debt ranged from 0.69% to 13.00% and from 0.50% to 13.00%, respectively. Final maturities of VIE long-term debt for each of the five years following December 31, 2014 are as follows: 2015-$77,920; 2016-$0; 2017-$0; 2018-$162,939; 2019-$393,235.