Shares of Ambac Financial Group Inc. jumped 65.79% to $1.26 yesterday in its first trading since announcing Wednesday night that bond insurer subsidiary Ambac Assurance Corp. paid $1 billion to financial counterparties to commute four transactions representing $3.5 billion of notionalized outstanding collateralized-debt obligation exposure.
As a result of the CDO commutations, Ambac expects to "record positive adjustments to its aggregate mark-to-market and impairment reserves" and said that Ambac Assurance's rating agency capital position should improve.
"My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction," Ambac chief executive officer David Wallis said in a statement. "Ambac has consistently emphasized that in this period of extreme uncertainty in the capital markets, the de-risking and de-leveraging of our balance sheet is our highest priority. These settlements represent positive and tangible steps towards that goal."
The announcement came after Standard & Poor's had earlier in the day downgraded Ambac Assurance to A from AA. Standard & Poor's said yesterday the termination would not impact Ambac's rating, and that the potential for settlements had already been factored into its analysis.
The exposures included two CDO transactions and two "CDO-squared" transactions. Ambac had internally downgraded all four transactions below investment grade.
The settlements follow Ambac's August announcement that it had paid Citi $850 million to commute a $1.4 billion CDO-squared transaction. A number of other bond insurers are also working to settle on their structured finance exposures.
For Ambac shareholders, "commutations help, but they're not the solution," Friedman, Billings, Ramsey Group Inc. analyst Steve Stelmach wrote yesterday in a report.
"While we view the commutations as a positive, they do not answer ongoing business model concerns," Stelmach wrote. "The capital benefit is not likely to be sufficient for [Ambac] to regain any lost ratings."
And while these deals may help shareholders of the bond insurers, others have said they could have drawbacks for creditors.
Moody's Investors Service said yesterday in a report on the financial guaranty industry: "Recent attempts by some guarantors to commute troubled CDS exposures with their bank counterparties, often with the support of their regulator, have raised questions about the commitment to pay all claims and treat contingent creditors consistently."
