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S&P Drops Ambac Assurance to BBB

Standard & Poor's yesterday downgraded bond insurer Ambac Assurance Corp. to BBB from A, saying it believes the company is "effectively in runoff." The rating is on negative watch.

Ambac last week announced it was postponing its efforts to start muni-only insurer Everspan Financial Guaranty Corp. The company cited difficulties raising the third-party capital it needed to achieve sufficient ratings to launch the insurer.

"The downgrade stems from our view that Ambac is effectively in runoff," Standard & Poor's said. "We also lowered the ratings because of our belief that the likelihood of the company continuing as an operating entity capable of writing new business has decreased significantly."

A spokesman from Ambac said the company would not be commenting on the downgrade. The stock finished yesterday down 9.01% to $1.01.

Wisconsin insurance commissioner Sean Dilweg said he is still "very confident" in Ambac's claims-paying ability.

"We still monitor that very closely," he said. "We are running our own stress test and I'm confident with the claims-paying ability at this point."

Ambac's ratings would be no higher than BBB as a company in runoff, Standard & Poor's said. The rating agency could make further downgrades if it determines the insurer's capital position has weakened after reviewing its insured portfolio.

Standard & Poor's said Ambac's portfolio "could become concentrated and lack sufficient sector diversity" as it runs off. It also has exposure to 2005 through 2007 vintage direct residential mortgage-backed securities and collateralized debt obligations of asset-backed securities that could "erode capital adequacy."

In addition, parent Ambac Financial Group Inc.'s debt service needs "might also place pressure on capital adequacy."

Standard & Poor's downgraded the counterparty credit rating on Ambac Financial Group to BB on negative watch from BBB with a negative outlook.

Ambac said it had public finance exposure of $231.9 billion outstanding as of March 31, according to its most recent quarterly filing. Public finance made up 56.1% of its total net par outstanding.

California general obligation bonds represent Ambac's single-largest domestic public finance exposure. Ambac has $3.048 billion net par outstanding on the state's GOs, or 0.7% of its total net par outstanding.

Its second biggest domestic public finance exposure is to New Jersey Transportation Trust Fund Authority bonds, with $2.031 billion net par outstanding exposure. Washington state GOs, New York State Thruway Authority highway and bridge revenue bonds, and Bay Area Toll Authority toll bridge revenue bonds round out Ambac's top five exposures.

Ambac has said it does not plan to split its public finance and structured finance book. Everspan would have been a subsidiary of Ambac Assurance, but would not have taken on its existing public finance obligations.

MBIA Inc. has drawn lawsuits from structured finance counterparties since restructuring its company to split off its public finance book from its structured finance exposures.

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