Sell Side

Fitch Downgrades Ambac to Double-A

The credit crisis claimed its first bond insurer as Fitch Ratings Friday downgraded Ambac Assurance Corp.’s insurer financial strength rating to double-A from triple-A after the insurer announced it would abandon the capital raising plan it first announced last week in an effort to maintain its top rating.

Citing the insurer’s capital shortfall, the rating agency made the decision to cut the bond insurer and also dropped the rating of Ambac’s parent, Ambac Financial Group Inc., to A from AA. Both new ratings remain on negative watch.

Standard & Poor’s put Ambac’s rating on negative watch Friday, while Fitch said its downgrade affects 137,390 municipal bonds.

In response to multiple inquires from bond lawyers and issuers regarding their obligation under their continuing disclosure commitments, the Securities and Exchange Commission’ late Friday said, individual material event notices informing investors of the Ambac rating change were not required.

“Staff of the Commission has informally stated that press coverage of the recent downgrade of Ambac by Fitch has been so widespread and extensive that, in the opinion of staff of the Division of Trading and Markets, no material event notices of this event need be filed at this time,” said Martha Mahan Haines, chief of the SEC’s office of municipal securities.

All the action started on Friday morning when Ambac — after seeing its stock price plummet Wednesday and Thursday on news of its capital raising plan — made public that it would scrap that plan. Both analysts and stock holders said the capital plan would dilute shareholder value.

Ambac said in a statement that “it has determined that as a result of market conditions and other factors, including the recent actions of certain rating agencies, the raising equity capital is not an attractive option at this time. The company is continuing to evaluate its alternatives.”

Moody’s Investors Service late Wednesday put Ambac on review for possible downgrade, citing Ambac’s report earlier that day of 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 collateralized debt obligations backed by subprime and residential mortgages stood at $32.2 billion, according to Fitch.

“There is nothing close to being final but we are just looking at alternatives other then equity and a debt issuance is obviously unlikely given the cost in this market also,” Peter Poillon, an Ambac spokesman said Friday after the insurer shelved its capital raising plan.

Fitch was fast to respond.

“The public statement that [Ambac] is going to stop their efforts to raise capital is the reason for this action,” said Fitch’s Tom Abruzzo. “It became clear that they were not going to meet the month-end time frame that we had set for them so we had to take action. Moving forward, we are obviously going to look at their capital base and we will take further action as time moves on.”

Abruzzo went on to say that Fitch is in touch with Ambac, but he could not yet speak to future plans. Abruzzo also would not comment as to what the action by Ambac means for other triple-A insurers, such as Security Capital Assurance and Financial Guaranty Insurance Co., which in December were put on watch by rating agencies for lacking adequate capital reserves to meet its subprime exposure. Neither has yet released details of plans to raise capital.

Dick Smith, managing director at Standard & Poor’s, believes Ambac’s move could mean problems for other insurers that intend to raise capital.

“It does has implications for others trying to raise capital,” Smith said. “If nothing else it suggests that certain strategies that they may have thought were available to them may not be. It only deepens the world’s negative feelings about this industry.”

SCA declined to comment Friday and FGIC did not return calls.

About Standard & Poor’s action on Ambac, Smith said: “Our response to them pulling the equity offering was putting them on credit watch. Obviously for them, two or three days ago, the equity deal was the best thing on their plate. Now with the market’s reaction and the combined impact of their own announcement and the rating agencies’ announcements it is not an option. They are in a difficult spot and it is made all the more difficult with Fitch’s downgrade today.”

Standard & Poor’s has a 90-day window for Ambac to take action.

Moody’s action on Ambac came before the Friday statement that it would no longer raise capital.

Moody’s has yet to take action on the new policy, but vice president and senior analyst James Eck Friday said “we are aware of this morning’s announcement and we will continue to evaluate Ambac’s risk exposures and capital in the context of its revised plan.”

Ambac has scheduled a conference call for investors on Jan. 22 at 10 a.m. Eastern Standard Time to discuss fourth-quarter 2007 earnings, which are scheduled to be released at 6 a.m. that morning.

Last year, Ambac was the second-busiest insurer in the municipal market last year according to Thomson Financial.

Ambac stock gained in morning trading only to end up with slight losses after the downgrade announcement. It dropped $0.04 or 0.64% to $6.20 at the close of the trading session Friday.

The muni market response to the news on Friday was not good. Lenny Coviello of Standard & Poor’s Securities Evaluations said that bonds insured by Ambac, FGIC, XL Capital Assurance, MBIA Insurance Corp. and CIFG Assurance NA were all gravitating towards the rating on their underlying credits.

Matt Fabian, managing director at Municipal Market Advisors agreed, saying the insurer turmoil was also having a secondary effect on the market’s perception of all bond insurers, even Financial Security Assurance Inc., which has not had its rating nor outlook impacted.

“The market is systematically trading all insured bonds cheaper than the uninsured,” Fabian. “In all places there is just no bid for insured bonds right now. I think next week we are going to see huge bid wanted lists. This may trigger the big market sell off that people have been fearing.”

Ross Berger, vice president of the Wells Fargo proprietary portfolio, also said that “the downgrade risk for monolines will force buyers to understand and evaluate credit risk. It will cause a greater tiering in pricing between credits, and between the various wrappers.”

Fabian also thinks that Ambac could continue to slide.

“The most likely direction is that Ambac continues to get downgraded overall [from different agencies and lower ratings] with really the floor as the limit,” he said. “Absent the sale of the company, I don’t see them as having a good chance of restoring market confidence.”

Market sources also said that the short-term floating rate market was also responded very poorly.

“The floating rate market is having a full blown meltdown right now,” one market analyst said. “There is over $200 billion floating rate, puttable bonds that are insured by companies other then FSA and the money funds are dumping them off.”

In other insurance news, the deadline loomed Friday for ACA Financial Guaranty Corp. to respond to the Maryland Insurance Administration about a long-term forbearance agreement or some other long-term structure to relieve pressure on its capital adequacy. The insurer was downgraded to CCC from A by Standard & Poor’s in December.

“The deadline extends through midnight tonight, so they have up until 11:59 to extend those forbearance agreements or whatever arrangements they may have made,” said Karen Barrow, a spokeswoman for the insurance administration.

Nothing had been announced from ACA by deadline Friday.

Also, MBIA Inc. Friday released a statement concerning Thursday’s announcement by Moody’s that it put the bond insurer’s triple-A rating was on review for a possible downgrade following its sale Jan. 11 of $1 billion in subordinate notes.

MBIA said it was surprised by the rating agency’s decision given its recent capital raising.

“We have developed and are implementing a comprehensive capital strengthening plan in good faith reliance on Moody’s stated requirements,” said MBIA chairman and CEO Gary Dunton. MBIA stock lost in morning trading. It decreased $0.67 or 7.27% to 8.55 at the end of the day.


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