On Thu, 17 Jan 2008 19:05:18 -0700, Winston_Smith wrote:
Ambac Tumbles on More Subprime Fallout The bond insurer joins the
financial industry's frenzy to raise capital as it warns of a
by David Bogoslaw
Shock waves from the subprime-fueled credit crisis continue to reverberate
through the financial industry
on Jan. 16 as Ambac Financial Group (ABK) pre-announced a gargantuan net
loss of $32.83 per share for the fourth quarter.
And with the prospect of losing its coveted triple-A rating, the
struggling bond insurer said it plans to raise at least $1 billion,
following fast in the footsteps of rival financial guarantor MBIA Inc.
(MBI), which announced its own recapitalization program a week earlier.
The rush to bring in capital comes as these companies anticipate
substantial writedowns on their securities portfolios for the latest
quarter. And that strategy has now cost Ambac its long-time chief
executive, Robert Genader, whose disagreement with aspects of the
capital-raising plan influenced his decision to retire, effective
immediately, according to a company filing to the Securities and Exchange
On Jan. 16, Ambac said that the projected fair market value of its credit
derivative portfolio for the fourth quarter came to an estimated loss of
$5.4 billion, pre-tax, and $3.5 billion, after tax. Roughly $1.1 billion
of the pre-tax, mark-to-market loss represents estimated credit impairment
related to some collateralized debt obligations of asset-backed securities
trades, transactions backed mostly by high-risk, subprime residential
mortgage-backed securities that Ambac has downgraded to junk status.
The New York-based company also warned it will report a loss provision of
about $143 million, pre-tax, for the latest quarter related chiefly to
underperforming home equity line of credit and closed-end second lien
residential mortgage-backed securitizations.
The losses are expected to result in a net loss of $32.83 per share for
the fourth quarter, up to $5.80 of which is an estimated operating loss
due to losses on CDOs and home equity line of credit transactions. The
company also said it expects its book value to be roughly $21.00 per share
at the end of 2007. Ambac moved its fourth-quarter results release up one
week to Jan. 22.
Ambac's stock was trading 35.3% lower at $13.67 on Jan. 16, after hitting
a fresh 52-week low of $13.38 earlier in the day. Shares of both Ambac and
MBIA got hammered on Jan 8 in response to Morgan Stanley cutting its
profit estimates for the two companies, citing deterioration in the credit
While the company's per share-loss is eye-popping, its total loss pales in
comparison with a $38.6 billion writedown taken by General Motors in the
third quarter of 2007 and AOL Time Warner's $45.5 billion charge in the
fourth quarter of 2002, the largest in the history of the S&P 500 index.
"The $5.4 billion loss was bigger than I thought, although I knew it would
be something big," said Gary Ransom, an analyst at Fox-Pitt Kelton Cochran
in West Hartford, Conn. "The surprise was more the $1.1 billion of actual
losses," which is the actual credit impairment and which the company is
categorizing as an operating loss. It's more like an insured loss, even
though it's accounted for as mark-to-market," he said. (Fox-Pitt or its
affiliates may seek compensation from investment banking within the next
The remainder of the $5.4 billion is considered purely mark-to-market and
not something the company actually expects to take losses in. Ambac will
get that money back as the bonds it has insured mature and the loss on
them accrues toward zero over time, he said. Of course, Ambac would get
the capital back sooner if a recovery in the credit markets came more
Ransom, who rates Ambac in line with other financial guarantors and has an
overweight rating on the entire sector, cut his 2008 earnings forecast to
$4.85 from $7.55 per share and lowered his price target to $24.
The plan Ambac announced to boost its capital base by issuing at least $1
billion of equity and equity-linked securities, with additional capital
possibly to be raised from reinsurance or by issuing corporate debt is
geared toward preserving its triple-A rating from Fitch Ratings. Until the
Moody's announcement of Jan. 17, the company's existing capital had met or
exceeded the triple-A requirements of Moody's and fellow rating agency
Standard & Poor's. (S&P has not commented on a potential downgrade of
Ambac also plans to preserve capital by cutting its quarterly dividend to
seven cents from 21 cents per share. MBIA cut its dividend by 62% to 13
cents per share on Jan. 9.
Analyst Tamara Kravec at Banc of America Securities said in a Jan. 16 note
that she was disappointed that Ambac was raising such a large portion of
equity capital. She predicted that at the current share price the
transaction would dilute the company's earnings and book value by 30% to
35%, with the lower book value not including $4.3 billion in
mark-to-market adjustments that aren't credit impairments. (BAS has
provided investment banking services for Ambac within the past 12 months
and expects to provide them within the next three months.)
Morningstar Inc. (MORN) takes the risk of a downgrade from Fitch more
seriously, however, seeing the triple-A rating as critical to Ambac's
ability to attract future business. In a Jan. 8 note, Morningstar analyst
Jim Ryan warned of the unknown levels of risk carried by insured
derivatives that "in extreme distress situations could cause claims
sufficient to wipe out Ambac's capital." The risk of a lower credit rating
could also trigger capital calls, whether necessary or not, that could
exceed the Ambac's resources, it said.
Morningstar advised would-be investors to consider the insolvency risk
before buying the company's stock.
Ambac appointed Michael A. Callen as chairman and interim chief executive,
succeeding Genader. Callen has been a presiding director and a member of
the Board's Audit and Risk Assessment, Compensation and Governance
The company is searching for a permanent CEO both internally and
A change in leadership at this time poses a challenge in an already
difficult environment for Ambac, analyst Tamara Kravac said in a Banc of
America Securities note on Jan. 16.
Some analysts are warning that Ambac may lose market share this year to
such rivals as Assured Guaranty Ltd. (AGO) and FSA Group FPO (FSA.AX),
which are seen as having avoided major CDO and mortgage-backed security
problems. Warren Buffett's entrance into the municipal bond insurance
industry is also expected to siphon off customers from Ambac and other
insurers with exposure to toxic securities.
Ransom at Fox-Pitt Kelton said he doesn't think Ambac will have a problem
writing new business, although in the near term the company will probably
attract less business due to concerns about its portfolio risk.
He doesn't see the upstart Berkshire Capital Assurance, a unit of
Berkshire Hathaway Inc. (BRKA) posing a real competitive threat in 2008,
as it still needs to put its infrastructure in place and to get its
insurance business rated by the ratings agencies.
Ambac's insurance services will also be in demand by states like
California that need to spread their risk among a range of financial
guarantors to avoid having all their eggs in one basket, he added.
-- Regards, Curly