AMBAC’S CAPITAL PLAN GETS MIXED REVIEWS

Ambac’s recent announcement that it plans to raise $1.5 billion in new capital received mixed reviews from the three major rating agencies. S&P, Moody’s and Fitch left their current ratings on Ambac in place, and on negative watch, pending the outcome of the insurer’s attempt to bolster its capital position.

Ambac said yesterday it was taking several steps to deal with its capital crisis. The company intends to raise $1.5 billion through the sale of common stock and equity units, while exiting the structured finance business for six months.

Wall Street observers were generally disappointed in the announcement’s details. The bond insurer had been in discussions with several of the nation’s largest banks to obtain a major capital infusion, but it never materialized.

They were also disappointed that Ambac did not split itself into two units, one specializing in the low risk municipal bond insurance business, and the other focusing on high risk structured finance. 

To some Wall Street critics, the new plan does not go far enough to alleviate Ambac’s exposure to the sub-prime mortgage market, or to ensure a continued market presence as a guarantor of municipal bonds.

Rating agency reactions were largely uniform. Moody’s indicated its continuing review would concentrate on whether capital raising measures and changes to underwriting and risk management standards are successful. If so, Ambac’s “Aaa” insurance financial strength rating would likely be affirmed.

Standard & Poor’s stated that the negative watch for Ambac’s “AAA” rating will remain in place for now, pending the outcome of Ambac’s capital raising plan. If the plan succeeds, and the other elements of Ambac’s improvement remain in place, S&P will likely affirm the insurer’s rating, drop the negative watch and leave Ambac’s rating with a negative outlook. (“Outlook” reflects the general direction of a credit’s fundamentals over a two-three year period, while “watch” indicates imminent action.)

Fitch Ratings left Ambac’s financial strength rating at “AA” on rating watch negative. Fitch’s comments suggested that its review will concentrate closely on Ambac’s continued sub-prime risk exposure. Fitch also noted that it is unlikely to restore the insurer’s former “AAA” rating until Ambac proves that its sub-prime exposure is contained and that its municipal finance insurance business has returned to a “leadership” position.

3/6/08

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