Ambac Financial Group Inc. said Friday night it will postpone its planned $850 million recapitalization of subsidiary Connie Lee Insurance Co. following Moody's Investors Service decision Thursday to place the Aa3 rating of Ambac Assurance Corp. on review for possible downgrade.
It planned to have Connie Lee write business as muni-only guarantor as early as the fourth quarter, but has now decided to "decelerate" its timeline. Moody's placed Ambac's rating on review for downgrade along with the A2 rating of MBIA Insurance Corp. following an increase in the rating agency's cumulative loss projections for subprime residential mortgage-backed securities exposures.
The action could also affect MBIA's agreement to reinsure $184 billion of Financial Guaranty Insurance Co.'s public finance portfolio. The closing of the deal is contingent on MBIA's A2 rating with a negative outlook or better from Moody's and AA rating with a negative outlook or better from Standard & Poor's, according to documents filed with the New York Insurance Department.
The New York Insurance Department said it is "reviewing the situation." MBIA declined comment. FGIC also declined comment.
Moody's projections of expected losses on 2006 vintage first-lien subprime pools now stand at 22%, compared to the 14% to 18% the rating agency projected in January, it said in its release. It has increased its stress-case loss level to more than 30%. The review will focus on how the change in these assumptions affect the loss projections and risk-adjusted capital positions of Ambac and MBIA.
The review will also examine the impact to Syncora Guarantee Inc., FGIC, and CIFG Assurance NA, although none were put on review for downgrade.
Both Ambac and MBIA expressed disappointment with the decision. Moody's said it could downgrade both multiple notches.
"Ambac believes that Moody's rating actions continue to cause confusion, uncertainty, and the risk of material economic damage if their assumptions ultimately prove to be too onerous," said chairman and chief executive officer Michael Callen in a statement. "We are aggressively managing our mortgage-related exposures and have made demonstrable progress in reducing the risk in our insured portfolio. Ambac's financial strength will continue to improve as we de-lever and commute and remediate our exposures."
MBIA said it believes Moody's expected level of losses "is the very definition of 'stress,' " meaning there is no need to add to it for a stress-case loss level. In addition, it says it has increased its capitalization over the year and has generated liquidity in its asset-liability management portfolio through rebalancing and at the holding company level through debt buybacks.
"Moody's will spend the next few weeks running their models using stress assumptions on top of what is obviously already an actual stress case," said Jay Brown, MBIA Chairman and CEO, in a statement.
"While we will work with them to point out the inherent flaws in their logic, we believe our owners should take this as yet another upward revision in model assumptions forged in the heat of a panic driven market," he said. "The reality is we have worked for the past three months to minimize actual economic loss caused by changes in rating opinions and have plans in place to deal with any outcome of this review."
Also Thursday, Assured Guaranty Ltd. signed an agreement with billionaire Wilbur Rosse_SSRq W.L. Ross & Co. that allows its investment funds to purchase up to five million more shares of Assured through open-market transactions. A previous investment agreement prohibited W.L. Ross from acquiring any additional stock. W.L. Ross owns 13.4% of outstanding stock and could increase its ownership level to $18.9% through the new agreement.
"We appreciate the continued support of W.L. Ross as it reflects confidence in the long term prospects of Assured and also recognizes the significant value in our stock and company through these turbulent times," said Dominic Frederico, president and CEO of Assured Guaranty Ltd., in a statement.
In addition, Radian Group Inc. announced Thursday it had completed the primary part of its capitalization plan by transferring its ownership interest in financial guaranty subsidiary Radian Asset Assurance Inc. to its mortgage insurer Radian Guaranty. Radian Asset has a statutory surplus of $960 million and will provide Radian Guaranty with a "substantial amount of capital over time," Radian Group CEO S.A. Ibrahim said in a statement.
Meanwhile, the Securities and Exchange Commission temporarily banned short selling on nearly 800 financial firms Friday, including publicly traded bond insurers. Ambac and MBIA, in particular, are among the most heavily shorted stocks in the market.
