Ambac hoping for $1.5 billion in sale of shares
Troubled bond insurer Ambac Financial Group Inc. said Wednesday that it would raise $1.5 billion in capital by selling shares in an effort to preserve its all-important credit rating, but the plan disappointed Wall Street and its stock price tumbled.
Like other bond insurers, Ambac has significant exposure to faltering sub-prime mortgage securities and needs to boost capital to guard against large-scale defaults.
However, Wall Street expected the company to raise as much as $3 billion, and its apparent inability to do so at an acceptable price underscored its financial predicament.
Investors also were dismayed that the plan didn’t appear to have heavy involvement by big Wall Street banks, whose participation would signal confidence in Ambac’s prospects.
“The action raises more questions than answers,” said Ed Grebeck, chief executive of Tempus Advisors, a debt-strategy firm in Stamford, Conn. “It doesn’t come anywhere near to achieving the funding that is required.”
Shares of Ambac sank $2.02, or 19%, on Wednesday to $8.70.
In recent years, straying from their traditional, low-margin business of insuring safe municipal obligations, bond insurers increasingly extended guarantees on sub-prime securities. But mortgage-backed instruments have skidded in value in the last year and threatened the insurers’ ratings.
Ambac has retained its triple-A credit rating from Standard & Poor’s and Moody’s but was downgraded to double-A in January by Fitch Ratings.
Fitch said the new capital would help Ambac retain its double-A status but wouldn’t be enough to regain a triple-A rating. First Ambac must “effectively limit the downside risk” of its sub-prime exposure, said Tom Abruzzo, a Fitch managing director.
The bond insurers will suffer if sub-prime securities keep falling in value, said Martin Weiss, president of Weiss Research Inc. in Jupiter, Fla.
“They’re trying to stem the tide, but the bottom line is those assets are deteriorating rapidly,” Weiss said. “No amount of sugar coating or window dressing is going to change that reality.”
The status of Ambac’s plan had evolved into a financial-market touchstone, with stocks often rising or falling depending on whether discussions seemed to be on track.
If the insurers’ ratings are cut, the sub-prime bonds they insure probably would be downgraded as well.
That could force Wall Street firms that own the bonds to take further write-offs, potentially worsening the credit crunch.
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