Should be interesting to see what they come up with. Based on reviewing ABKs information, I don't think things are as dire as some suggest (GS for example estimates that ABK common is worth aproximately $15 per share if they go into runoff mode and slowly liquidate their liabilities). Thinking out of the box, if ABK is insurring CCI for an expected loss with a present day value of $x, it might be possible for CCI to relieve ABK of the liability in return for a prefferred equity stake in ABK of x (or 115% of x). Something like that could be a win-win solution for CCI, ABK and the financial markets. But other solutions are also possible IMO.
Here's a marketwatch article with some speculation:
Banks may recapitalize Ambac in bid to save AAA rating
6:43 PM EST February 22, 2008
SAN FRANCISCO (MarketWatch) -- A group of eight banks that are major counterparties to AMBAC Financial Group may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday.
The negotiations have progressed in recent days, the people said, on condition of anonymity.
The plan could be unveiled Monday or Tuesday, according to one of the people. But the other person said no firm timetable has been set. Both also noted the plan isn't a done deal.
Barclays PLC, BNP Paribas , Citigroup Inc. , Royal Bank of Scotland Group, Societe Generale , UBS AG, Wachovia Corp. and Dresdner Bank, owned by German insurer Allianz , are the banks involved in the talks, the two people said.
The group recently hired boutique bank Greenhill & Co. to help with the negotiations.
"We have a lot of alternatives. A capital raise has always been an option to stabilize the rating," said Vandana Sharma, a spokeswoman for Ambac , in an interview. "We're trying to do the best by all constituents, including policy-holders, shareholders and counterparties."
Sharma declined to comment on specific plans.
Ambac shares surged 16% to $10.71 Friday.
Other bond insurers also climbed. MBIA Inc. gained 2.4% to $12.18 and Security Capital Assurance rose 2.7% to $1.55.
Splitting up
Bond insurers agree to pay interest and principal on debt in a timely manner in the event of default. The $2.4 trillion business relies on AAA ratings to win new business. But those top ratings are in jeopardy now because of concerns insurers like Ambac and MBIA will have to pay big claims from guarantees they sold on complex mortgage-related securities known as collateralized debt obligations (CDOs).
If the situation gets bad enough, regulators including New York State Insurance Superintendent Eric Dinallo are considering splitting bond insurers in two. That would separate their steady muni bond businesses from the more troubled structured finance units, which are being pummeled by CDO exposures.
Indeed, FGIC, a big rival of Ambac and MBIA, submitted a plan with some of those attributes last week.
However, splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies.
"The lawyers have already begun gearing up on that one," said Josh Rosner, a managing director at research firm Graham Fisher & Co.
Injecting capital
So Dinallo and others have also been working on other solutions that focus on attracting more capital into the industry. As part of that strategy, the New York regulator has been trying to persuade big banks that are counterparties to the industry to help boost bond insurers' capital.
Many banks have tried to hedge CDO exposures by buying guarantees from bond insurers in the form of credit default swaps (CDS), a type of derivative. If lots of bond insurers are downgraded or if some collapse, these banks may suffer more write-downs because these CDS contracts will be worth less. See full story.
One proposal involves banks injecting roughly $5 billion of capital into specific bond insurers and also providing a $10 billion line of credit.
Another idea involves commuting, or effectively tearing up, CDS contracts between banks and bond insurers. In return for dropping their claims, the banks would get a preferred equity stake in the bond insurer.
"Putting capital into an insurer is more of a contract issue between the companies involved, rather than a regulatory issue," said James Gkonos, vice chairman of the Insurance Practice Group at law firm Saul Ewing. "That would be the simplest and most efficient way to do this."
A forced splitting up of a bond insurer by a regulator such as the New York State Insurance Department would be an "extreme scenario" that would involve public hearings and litigation and take a long time to complete, he explained.
Still, any re-capitalization of Ambac by bank counterparties would present its own problems too, because it could dilute existing investors in the company.
Such a plan would also use up capital that banks may need to help them through other problems thrown up by the global credit crunch.
"Sometimes there are problems that just can't be solved," Rosner said. "At some point, the market is going to realize that there is not always a best solution. There is often just a least worse solution."
