Real Estate Lender Implosion

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Ambac tumbles on $1.5bn stock plan

By Aline van Duyn, Francesco Guerrera and Ben White in New York

Published: March 5 2008 20:02 | Last updated: March 6 2008 01:03

Ambac, the troubled bond insurer, lost nearly a fifth of its stock market value on Wednesday after revealing a $1.5bn recapitalisation plan that disappointed investors hoping for a bigger rescue effort.

Investors anticipated Ambac would receive a cash injection of up to $2bn from a group of banks. Instead, Ambac said it would sell at least $1bn of common stock and $500m of other equity instruments in an offer to be priced today, substantially diluting its existing shareholders.

Ambac has been racing to find fresh capital because its triple-A credit ratings have been threatened by losses on guarantees it made on securities backed by subprime mortgages and other assets.

Efforts to prevent ratings cuts at Ambac and MBIA, the biggest bond insurer, were stepped up in January after Eric Dinallo, New York insurance superintendent, held a meeting with banks, urging them to consider shoring up the bond insurers to prevent market turmoil.

Eight banks led by Citigroup and UBS – which between them bought the most guarantees from Ambac – had been prepared to inject up to $2bn into the insurer under a plan that would have split its operations into a triple-A rated municipal bond insurance business and a lower-rated structured finance business.

However, the complexity of the scheme led to its rejection by credit ratings agencies and Ambac, people involved in the negotiations said.

A lower rating on Ambac’s structured business could lead to billions of dollars of write-offs at banks, which would be forced to cut the value of guarantees on complex debt securities and derivatives.

Ambac’s share price fell 19 per cent after the company, in revealing the share offer, said it could not rule out future pressure on its ratings or further capital raising. However, the $1.5bn offer appeared to stave off the possibility of a imminent ratings cut by Moody’s Investors Service and Standard & Poors.

S&P said it was likely to confirm Ambac’s triple-A credit rating once new equity was raised. But it said its outlook would remain negative, reflecting the “potential for further mortgage market deterioration” that would challenge bond insurers’ ability to “gauge their ongoing capital needs accurately in the near term”.

Fitch, which has cut its ratings for Ambac to AA, said it did not think it would be possible for for Ambac to regain its triple-A rating until “its subprime risk can be effectively contained”. Moody’s said it planned to affirm Ambac’s triple-A rating.

Eliot Spitzer, governor of New York, and Mr Dinallo’s boss, said: “Combined with the prior affirmation of MBIA’s credit ratings, eliminating concerns about Ambac’s ratings should have broad benefits for the financial markets and provide stability for the municipal bond market.”

http://www.ft.com/cms/s/0/347cbfce-eaed-11dc-a5f4-0000779fd2ac.html