Archive for the “Ambac Financial” Category

Ambac Financial Group Inc., the world’s second-largest bond insurer, raised $1.5 billion in an effort to save its AAA credit rating. Is this an effective long-term strategy?

The firm had to do something. Its creditworthiness was in jeopardy after posting record losses from subprime mortgage-backed securities, which came on top of $556 billion in municipal and asset-backed securities already at risk.

Ambac raised the capital through the sale of shares and convertible units to banks, shareholders, new investors and private-equity firms, according to Ambac CEO Michael Callen in a story at Bloomberg.com. The sale more than doubled Ambac’s outstanding stock, which may appease Moody’s and Standard & Poor’s.

These rating agencies may also look favorably on some of Ambac’s new shareholders. Cerberus Capital Management LP, a New York private-equity firm, invested $50 million in equity units, and banks bought $405 million of common stock. BNP Paribas and the Royal Bank of Scotland bought $95 million of shares through a private placement; banks now hold 40 percent of Ambac shares.

Ambac says it will take additional steps to strengthen its capital. The firm will cut its dividend by 1 cent and suspend writing guarantees on many types of bonds – including, not surprisingly, those backed by mortgages.

Although $1.5 billion is a lot of money and these other moves are significant, Ambac hasn’t made everyone a believer.Â

“[Ambac] might be able to maintain the ratings at Moody’s and S&P for the time being, but it’s a Band-Aid,” said Robert Haines, an analyst at CreditSights Inc. He says $1.5 billion is only half of what the market wanted Ambac to raise.Â

JP Morgan Securities analyst Andrew Wessel agrees.

“[Ambac will] eventually absorb about $11 billion of losses from insured CDOs and mortgage-backed securities-related exposures,” he says. “And $1.5 billion of new capital – at first blush – does not seem like enough to fix the capital adequacy problem.”

In time we will see whether the rating agencies or the critics are accurate with their view of Ambac’s future.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.