Ambac Assurance Corp. saw its ratings affirmed Wednesday, as all three rating agencies moved the bond insurer off of imminent threat of downgrade to negative outlook, a longer time frame.
Standard & Poor's and Moody's Investors Service kept the bond insurer at triple-A, while Fitch Ratings maintained its rating at AA.
The rating actions come on the heels of Ambac's successful $1.5 billion capital raising, in which the bond insurer issued $1.25 billion in common shares and $250 million of mandatory convertible securities, called equity units.
The company has also announced plans to change its risk structure, to cease writing new structured finance business - expected to save $600 million in capital - for the next six months, and to promote an executive to the post of chief risk officer.
The efforts were cited by the rating agencies as the positive developments that led to the affirmations. The uncertainty about the scope of losses in the subprime mortgage-backed security market was the primary reason for keeping the insurer below the coveted stable outlook, the agencies said. If that market continues to deteriorate, Ambac might need more capital for reserves and to augment claims-paying ratios.
"The negative outlook reflects our view that the potential for further mortgage market deterioration remains uncertain and could challenge bond insurers' ability to gauge their ongoing capital needs accurately in the near term," Standard & Poor's said in its release.
Ambac viewed the affirmations as a positive step in stabilizing the market and cleaning up its name.
"When you take that uncertainty away from your name and get affirmed by Moody's and S&P, it is a huge stabilizer in the market," said Ambac spokeswoman Vandana Sharma.
Under the Moody's model, Ambac's stress-case losses could near $12.1 billion, compared to claims-paying resources of about $15 billion, for a total capital ratio of 1.24 times. This exceeds the lower threshold for a triple-A rating, but falls about $700 million short of the 1.3 times ratio required by Moody's for a stable triple-A, the agency said.
Fitch's model, on the other hand, estimates Ambac's pro forma claims-paying abilities to be $16 billion at the end of last year, which still falls $4 billion to $5 billion below the triple-A capital targets held by Fitch. The Standard & Poor's model shows that Ambac has a more than $1 billion capital cushion, according to Standard & Poor's managing director Howard Mischel.
MBIA Insurance Corp. last week asked Fitch to withdraw its rating because of the apparent severity of the model, but Sharma said she did not believe that Ambac had any plans to ask for a similar withdrawal.
"We will continue to maintain dialogue with the market, and Fitch is a part of the ratings market," Sharma said. "The only thing that is fair to do is to say we will keep talking and keep trying to understand. But more importantly, we need to get back to business of doing business."
However, it remains to be seen how the market will respond to Ambac's affirmed ratings. One analyst at JPMorgan, Andrew Wessel, said in a report yesterday that he believes Ambac will be unable to write any new business this year.
Through March 11, MBIA has written policies for 10 issues for a total of $262.7 million, while Ambac has insured nine deals for a total of $192.7 million, according to Thomson Financial.
Dick Larkin, director of research at Herbert J. Sims & Co., echoed these thoughts. "Until people can really get their hands around how bad this subprime mess is, even with the affirmations, I think MBIA and Ambac are still looked at as suspect," he said.
