Sell Side

Raters Want 3d-Party Investor for Everspan

Ambac Financial Group Inc. has experienced further delays in launching muni-only subsidiary Everspan Financial Guarantee Corp., its president and chief executive officer said yesterday.

Despite Ambac's attempts to structure the company as independent, rating agencies have suggested they are not sufficient and that Everspan may need to find a third-party investor to contribute capital to further ensure its "separateness" from its parent, bond insurer Ambac Assurance Corp., according to Ambac Financial. The company is in discussions with a number of potential investors, but the past few months have been "frustrating," said Ambac president and CEO David Wallis.

The comments came after Ambac Financial reported a first-quarter 2009 net loss of $392.2 million.

"This isn't an easy environment to raise capital," Wallis said during the company's first-quarter earnings conference call. "It's an extremely difficult environment to raise capital."

Ambac had already put its plan to recapitalize Everspan - the old Connie Lee Insurance Co. - on hold last year. Ambac initially planned to write new business through the subsidiary as early as October 2008, but delayed an $850 million capital injection after Standard & Poor's put Ambac Assurance on review for downgrade.

The company later unsuccessfully lobbied to get capital through the Treasury Department's Troubled Asset Relief Program.

Ambac's plans differ from the restructuring of MBIA Inc., which has drawn legal scrutiny. MBIA split off its existing public finance portfolio into National Public Finance Guarantee Corp., while Everspan will not take on Ambac Assurance's existing obligations.

Any potential investor and Ambac itself both need to make sure the risk-adjusted returns justify investment in Everspan, according to Wallis.

"Rest assured that we intend to pursue this initiative, but will only do so on terms and pricing that are sensible in relation to the stakeholder value objectives that remain our guiding light," he said.

Ambac earlier in the day had reported a first-quarter net loss of $392.2 million.

It reported a pre-tax net income of $279.7 million, primarily from unrealized gains of $1.5 billion in the fair value of its credit derivatives. Those gains were driven by the widening of credit spreads on Ambac Assurance, thanks to an accounting rule that discounts the value of the company's own liabilities by its own risk of non-payment.

The after-tax loss was caused by a $600 million increase in Ambac's tax-asset valuation allowance.

Ambac had net loss provisions of $739.8 million, relating mostly to its residential mortgage-backed securities insurance portfolio. It also reported other-than-temporary impairments of $830.2 million related to Alt-A and RMBS securities its subsidiaries hold in their investment portfolios.

"The credit environment remains adverse, although perhaps the rate of degradation is slowing," Wallis said.

In addition to capitalizing Everspan, Ambac has focused on managing its existing portfolio. Part of its efforts have included searching its insured portfolio for breaches of representations and warranties.

Ambac said it has booked $882 million of recoveries through the first quarter on non-compliant loans within its pools. It has started litigation against one originator and is pursuing put-backs of loans with two others.

Ambac is also monitoring government efforts in the mortgage sector, such as loan modifications and buybacks. It says the ultimate impact of these plans on the company remain uncertain but that they could help in the future.

"Stabilization of the housing market will likely have a positive impact on the insured portfolio," said chief risk officer Gregory Raab.

Ambac stock closed up 8.7% in trading yesterday to $1.75.


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