Real Estate Lender Implosion

[up-down]

Banks to aid Ambac with up to $3bn

By Aline van Duyn and Ben White in New York

February 23 2008 00:20

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

Ambac is also considering raising equity from shareholders and it is not yet clear how much capital it will need, or what credit ratings the split businesses will have. Talks between Ambac and the banks will continue this weekend, with a view to finalising a deal by early next week.

The banks looking at supporting Ambac include Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.

Bond insurers have for decades guaranteed debt issued by municipal borrowers, lending them, in effect, triple-A credit ratings in exchange for a fee. Bond insurers, or monolines, have ventured into structured finance guarantees, including guarantees on complex debt instruments such as collateralised debt obligations. The subprime mortgage crisis has led to a jump in losses in this sector, threatening the triple-A credit ratings of Ambac and MBIA, the biggest monolines.

Municipal borrowers are being hit by the crisis of confidence in the insurers, whose guarantees back $2,400bn of bonds. With interest rates for some municipals rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.

Last month, banks were called in to meet Eric Dinallo, the New York insurance superintendent, who urged them to discuss possible action to prevent downgrades. Federal policymakers did not arm-twist banks to take part in a rescue. But a senior Treasury official said it had to “blow some smoke away” so market participants understood their “indirect interest”.

http://www.ft.com/cms/s/73450cf8-e187-11dc-a302-0000779fd2ac.html