Sell Side

Ambac Announces Plan To Raise $1B; MBIA Affirmed

Two of the municipal market’s three busiest bond insurers yesterday inched closer to supporting the triple-A ratings their franchises depend upon, as one debuted a new capital plan and another saw its triple-A reaffirmed with a stable outlook.

Ambac Financial Group Inc., the parent of Ambac Assurance Corp., — the second-busiest insurer in the municipal market last year — announced a plan to raise at least $1 billion in capital and keep its triple-A rating, according to Securities and Exchange Commission filings.

Also yesterday, Fitch Ratings affirmed the AAA rating for MBIA Insurance Corp., the market’s third most-active bond insurer, and removed the insurer from its negative ratings watch and assigned a stable outlook after MBIA’s parent company successfully sold $1 billion in surplus notes last Friday. The note sale was the latest effort in the plan MBIA put out last week, intended to meet the necessary capital requirements to maintain their triple-A rating.

Ambac’s capital plan is similar to MBIA’s and is intended to insulate the company’s rating from the potential losses tied to its exposure to securities backed by subprime mortgages. Under the plan announced yesterday, Ambac will sell $1 billion in equity and equity-linked securities, with the potential to raise additional capital through reinsurance or the issuance of debt, and slashed its quarterly dividend to 7 cents from 21 cents. Ambac, in SEC filings late Wednesday, also described plans to issue both common and preferred stock, as well as debt securities.

Ambac also reported early Wednesday a $5.4 billion pre-tax, or $3.5 billion post-tax, mark-to-market adjustment in its credit derivative portfolio for the fourth quarter of 2007. As of Sept. 30, Ambac’s exposure to collateral debt obligations backed by subprime and residential mortgages stood at $32.2 billion, according to Fitch.

“This certainly gets [Ambac] over the near-term hurdle and that will help a little,” said Bruce Floberg, senior municipal analyst at RBC Capital Markets. “My sense is that we don’t know whether this is the end and I don’t think we can say for sure that they raised this billion and it is all they will need, but it’s going to take another quarter or more where the write-downs are less than expected, and you know that there is a sense that the worst is over. We are certainly not there yet.”

Ambac also announced that Robert Genader will step down as chief executive officer, effective yesterday. Genader’s departure is in part over disagreements with the board about the capital raising plan, according to the SEC filings.

Michael Callen, a director, will assume the duties of interim CEO and chairman of the board.

The departure of Genader, who has worked at the firm for more than 20 years, led some market sources to suspect that Ambac is heading in a new direction in addressing the company’s current troubles.

“[Genader] was the most visible face of that company,” said Dick Larkin, municipal strategist at JB Hanauer & Co. “I think it is a strong indication that Ambac is starting to turn the [company] around.”

On Dec. 21, Fitch placed Ambac on negative watch, while maintaining its AAA rating, giving the bond insurer four to six weeks to raise $1 billion in added capital or face a downgrade. Yesterday’s announced capital plan is the first step in meeting this requirement though details of exactly when and how it will be implemented are still unknown.

“Essentially this means that the company has until the end of the month to successfully execute its capital plan,” said a CreditSights research report released yesterday.

Ambac did not return calls for comment. However, Callen said in yesterday’s press release that “we have great confidence in our plan to enhance Ambac’s capital position by over $1 billion within an accelerated time frame.”

While market sources did not have any further details about the plan, one said that Ambac is likely to try to raise capital before approaching the reinsurance market, since the amount they will need to reinsure will depend on how much capital they raise.

Ambac has already reinsured a part of its book of business. On Dec. 13, Ambac said it would cede $29 billion of its financial guaranty contracts to Assured Guaranty Corp.’s double-A-rated reinsurer, Assured Guaranty Reinsurance Ltd. Standard & Poor’s calculated that would free up about $255 million of capital.,

The rating agencies’ reaction to Ambac’s plan and the efforts of other bond insurers looking to boost capital, like MBIA, remains divided. While Fitch reaffirmed MBIA’s rating and removed them from watch after the execution of their capital plan, Fitch did not comment yesterday on Ambac’s announcement.

The agency did in late December say that if Ambac “is able to obtain further capital commitments and/or put in place additional reinsurance or other risk mitigation measures ... Fitch would anticipate affirming Ambac’s ratings with a stable rating outlook.”

However, both Standard & Poor’s and Moody’s Investors Service have said they will wait until more information is known about both the bond insurers’ exposure to and extent of subprime-related write downs, and the viability of the bond insurance industry going forward, before making any ratings announcements to stabilize outlooks or reaffirm triple-A ratings.

Ambac is rated Aaa with a stable outlook by Moody’s, and AAA with a negative outlook by Standard & Poor’s. MBIA Insurance Corp. is rated triple-A with a negative outlook by both Standard & Poor’s and Moody’s.

In regard to MBIA’s sale of the surplus notes, Moody’s said in a release that there are uncertainties facing the financial guaranty companies in light of the recent market turmoil. These include “the possibility of a change in demand for the service provided by these firms, not just in the structured finance area where transaction volumes will be depressed for some time to come, but also in the US municipal market.”

Standard & Poor’s and lead analyst Dick Smith have expressed similar statements in the past.

About $1.1 billion of Ambac’s unrealized losses are related to collateralized debt obligations of asset-backed security transactions, according to SEC filings. Ambac also expects to report a pre-tax loss of $143 million related to exposure to home equity lines of credit and other residential mortgage-backed securities.

In announcing its version of the capital plan, MBIA said it will cut its quarterly dividend to 13 cents from 34 cents, reinsure a portion of its insured book to free up another $50 million to $150 million, and sell up to $1 billion in stock and options to private equity firm Warburg Pincus LLC, and sell at least $1 billion in surplus notes.

Fitch yesterday assigned a rating of AA to the notes, which are subordinate to all other debt issued by MBIA. Interest and principal payments are subject to suspension at any time by the New York State Insurance Department. The notes were sold with an initial five-year interest rate of 14% through 2013, after which the rate changes to become a value of the three-month London Interbank Offered Rate plus 11.26%. The notes are callable at par every five years.

However, a Reuters article yesterday morning reported that the price of the notes had sunk to about 90 cents on the dollar, for a yield of about 17%, based on mounting concerns that the bond insurer will see more downgrades of the subprime-backed securities that it insures.

On Tuesday, Standard & Poor’s revised the criteria it uses for evaluating residential mortgage-backed securities and is working on revising standards for the collateralized debt obligations backed by those securities. As a result, Standard & Poor’s extended the duration over which it calculates expected losses from three years to the lifetime of the transactions, and increased the expected losses on 2006 subprime collateral by more than a third.

At the close of New York Stock Exchange trading Wednesday, Ambac’s stock price fell 38.65%, to $12.97, while MBIA’s fell 16.51%, to $13.40 .


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