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Ambac Financial Group (ABK)
Ambac Financial Group Scrambles to Save its Credit Rating
Ambac Financial startled investors yesterday with news that it will have to take some serious action in order to maintain its "AAA" credit rating. The announcement was met with frustration and disappointment by investors, whose reaction led to a 19 percent drop in share price by the close of markets on Wednesday. Ambac has outlined a plan to raise the funds necessary to survive the barbs of the weak market with its rating intact, but analysts disagree as to whether or not these efforts will be sufficient. Will Ambac's ability to raise the funds convince its investors and industry experts that it is worthy of high marks, or will its rating slip along with its share price?
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Ambac insures $524 billion in debt through insurance policies for bondholders so that they are repaid when bond issuers default on either of two main types of bonds. They insure public bonds, or those issued by the government, as well as structured finance, which channels payments from other, more risky, sources such as mortgages. Ambac's troubles stem from guarantees it wrote on billions of dollars of structured finance bonds that have been deemed questionable. Given the weak state of the credit and lending market, investors are fearful that the ever-rising number of claims will force more borrowers into default.
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To combat these problems and save face among the ratings agencies, Ambac has unveiled a plan to increase its capital. With the support of the New York Insurance Department, the company hopes to raise the funds through a public offering of at least $1 billion of common stock and $500 million of equity units that could be exchanged for common stock in May 2011. The fresh influx of capital would allow Ambac to cover the claims that are likely to result after insuring risky debt such as subprime mortgage bonds. Noticeably missing from this equation is the role of banks such as Citigroup (C: Charts, News, Offers) or UBS (UBS: Charts, News, Offers) whose injection of funds would help get Ambac back on track. These institutions may be waiting in the wings after they can better gauge public response or they may choose to abstain from involvement all together.
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In addition to the call for capital, Ambac, the nation's second-largest bond insurer, has reduced its quarterly dividend from $0.07 to $0.01 and will postpone any new structured finance writings for six months. Analysts disagree with Ambac, however, as to whether these steps and the $1.5 billion will be enough to maintain their "AAA" credit rating and allow them to attract new business. Standard & Poor's and Moody's Investors Service have both indicated that the company would be able to keep the coveted rating if they are able to raise the funds. Fitch Ratings, on the other hand, has already downgraded Ambac to a "AA" rating and said it will not consider restoring the previous rating "until its subprime risk can be effectively contained."
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Ambac does have a more drastic alternative to consider in an effort to bolster its business. It could divide operations into a municipal bond unit and a structured finance unit, though it is a move the company is hoping it will not have to make. The company has garnered support from an optimistic New York Gov. Eliot Spitzer who said, "It is welcomed news that Ambac and the financial institutions that are working with the company are raising the necessary capital to preserve its credit rating for the benefit of all of its policyholders. Our goal has been and continues to be bringing stability to the bond insurers to protect the policyholders, including municipal bond issuers, investors and the banks. This critical capital injection will help Ambac maintain its current credit ratings." Whether his prediction is upheld remains to be seen.
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Click here to view a detailed profile of Ambac Financial Group.
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