Ambac warns downgrade would put unit under pressure Connie Lee plan postponed; $50 mln share buyback plan cancelled By Alistair Barr, MarketWatch Last update: 6:58 p.m. EDT Sept. 19, 2008 Comments: 53 SAN FRANCISCO (MarketWatch) -- Ambac Financial said late Friday that a downgrade by ratings agency Moody's Investors Service would leave its guaranteed investment contract business short of collateral to meet liabilities. The company also said plans to pump $850 million into a new municipal bond insurance business called Connie Lee have been postponed. It also cancelled a $50 million share buyback plan that was announced earlier this year. See full story. Moody's warned late Thursday that it may downgrade the main bond insurance units of Ambac again because losses on mortgage-related securities they guaranteed are likely to get much worse. Ambac shares slumped 42% on Friday after the warning, while MBIA stock fell 8%. See full story. Ambac shares fell another 7% to $3.60 during after-hours trading. Ambac said late Friday that a downgrade would increase pressure on its financial services business, which includes guaranteed investment contracts, or GICs. GICs provide institutions a certain rate of return on specific amounts of money. Providers promise to pay an agreed rate and get the money to invest in return. Profits are made on the spread between the rate the provider offers the buyer and the returns it can generate itself. Municipalities often use GICs when they get large sums of money from a recent bond offering, but don't want to spend the cash straight away. Ambac and MBIA have large GIC businesses. When GIC providers are downgraded by ratings agencies, they are often required to post more collateral to support the agreements, or come up with collateral when the contracts are terminated. Ambac estimated late Friday that if it's downgraded there won't be enough assets in its GIC portfolio to cover the projected cumulative collateral requirement and terminations. If Ambac is cut to A+ or A1, the shortfall will probably be $1 billion, the company estimated. If it's downgraded to A/A2 or A-/A3, the shortfall would increase to $1.9 billion. Ambac said it's talking with its insurance regulator "to review alternatives to meet a potential collateral shortfall in our GIC business in the event of a ratings downgrade." Connie Lee injection postponed Ambac also said its Connie Lee project will be delayed while the company deals with the potential consequences of a possible downgrade by Moody's. Connie Lee is a unit of Ambac that is already licensed in many states in the U.S. The company has been trying to pump $850 million of new capital into the subsidiary and launch it as a new bond insurance business focused on guaranteeing municipal debt and global infrastructure deals. See full story. If the plan works, Ambac may be able to generate more new business, improving the company's longer-term prospects. But on Friday, Ambac said the planned injection of $850 million in capital has been postponed. "We had hoped to launch this new financial guarantee subsidiary focused on the municipal sector in the fourth quarter and have been working tirelessly to do so," the insurer said. "However, the recent market turmoil and Moody's action cause us to decelerate our timeline." A planned $50 million share buyback announced earlier this year has been cancelled, Ambac also said. No shares had been purchased under the program. The move will help liquidity at Ambac's parent company, it explained. Alistair Barr is a reporter for MarketWatch in San Francisco.
Gasparino reporting tonight that Treasury considering stakes in several bond insurers including MBI ABK PMI. The companies will bid to write insurance on all debt of banks that Treasury is willing to insure under Paulson Plan. In exchange government will take stakes in ABK MBI etc. pretty interesting....
MBIA Inc., the largest bond insurer, jumped 32 percent to $9, trimming its 2008 loss to 52 percent. Ambac added 86 cents to $2.66, down 90 percent in the year. Ambac and other bond insurers are working on a plan to send to the Treasury that would enable them to sell troubled assets to the government, Chief Executive Officer Michael Callen said. The companies also may present a proposal next week that would allow the insurers to guarantee some assets with government backing, Callen said in an interview today. The Treasury's $700 billion program to buy troubled assets may allow the two guarantors to dispose of bonds backing collateralized debt obligations that they guaranteed, Royal Bank of Scotland Plc analyst Michael Cox said. Banks also may be more willing to cancel credit-default swap contracts they bought from bond insurers if the banks can sell the underlying CDOs to the government, Cox wrote.
Ambac, MBIA In The Clear Miriam Marcus, 08.15.08, 4:20 PM ET Bond insurers Ambac Financial Group and MBIA may be off the chopping block, at least for now. Shares of Ambac Financial Group (nyse: ABK - news - people ) skyrocketed Friday after Standard & Poor's said late Thursday it is no longer reviewing its ratings on the financial services company. Rival bond insurer MBIA (nyse: MBI - news - people ) also saw its share price rise Friday following S&P's filing with the Securities and Exchange Commission, though not quite as sharply. Ambac shares skyrocketed 29.2%, or $1.33, to $5.89, in late-afternoon trading in New York, while shares of MBIA bid up 8.1%, or 84 cents, to $11.16, despite S&P retaining its negative outlook on both companies. Still, Ambac shares are down 77.5% this year and MBIA remains down 41.2%. The negative outlook on MBIA and Ambac means they still may be downgraded from "AA," the third-highest rating, over the next two years. S&P said the outlook was assigned to both firms due to "significant exposure to domestic nonprime mortgages and related exposures to collateralized debt obligations of asset-backed securities." Bond insurers historically focused on municipal bonds but ventured into insuring repackaged mortgages and other debt in a bid to diversify and boost profits. Collateralized debt obligations, which are complex financial instruments that combine various slices of debt, and often include portions of mortgage-backed securities, have been among the biggest problems for bond insurers since late 2007. As underlying mortgages increasingly default, the value of CDOs has dropped, forcing insurers to set aside more cash to cover expected claims and write-down their value. Both MBIA and Ambac lost their top "AAA" ratings in June due to expected losses from risky mortgage-backed debt. The insurers also got a vote of confidence when mutual fund Third Avenue Value Fund said Thursday that it increased its position in MBIA to 23.6 million shares from 10.6 million shares and raised its stake in Ambac Financial Group to 27.7 million shares from 7.4 million shares, on April 30. "Third Avenue's mantra is safe and cheap," Morningstar analyst Bridget Hughes said. "Given the experience of Third Avenue with this type of investment, there is some comfort that it's shown some competency in execution."
Bond Insurers Seek Shelter Under TARP By JESSICA HOLZER Article Comments more in Business » WASHINGTON -- Bond insurers are urging the government to reinsure their battered portfolios, the latest push by the industry to seek relief under the Treasury's $700 billion financial rescue. The move sets up a clash with the banking industry, which wants the funds for any Treasury guarantee program to go toward insuring whole mortgage loans rather than securities. The U.S. bond insurance industry, which guarantees $2.3 trillion in debt securities, is urging Treasury not to exclude whole loans from the program in favor of a broad range of securities. "Their goal here is a program that would essentially reinsure their positions so the catastrophic losses they are facing would be eliminated," Karen Petrou of the consultancy Federal Financial Analytics said. Leading bond insurers Ambac Financial Group and MBIA Inc., reeling from a foray into insuring mortgage-backed securities, are lobbying hard for inclusion under Treasury's program to buy equity stakes in banks. So far they have been unsuccessful. Another part of the financial rescue package, however, presents a way for the industry to recapitalize with help from the government. Under the financial rescue legislation, Treasury is required to establish a program to insure rotten assets as a complement to its program to purchase such assets from financial firms. During negotiations with Congress, Treasury showed initial resistance to the guarantee program, pushed by conservative House Republicans as a less costly and more market-oriented solution to the credit crisis. But Treasury has since warmed to the idea, particularly as it has struggled to structure the more complex purchase program, a person familiar with the matter said. Insuring assets would be simpler for Treasury than buying them. For example, Treasury would be able to avoid pricing the assets -- a particularly vexing issue for the asset purchase program given the current illiquid market. The guarantee program would be funded through premiums on participating firms. Treasury has solicited public comments on how to structure the program, asking which assets should be made eligible and which firms should be allowed to participate. Because bond insurers hold risk tied to mortgage-backed securities but do not own the securities, they stand to benefit more from the guarantee program than the Treasury's asset purchase program. Ambac, MBIA, as well as other bond insurers Assured Guaranty Corp. and Syncora Guarantee Inc., provided comments Wednesday to Treasury on the program. Ambac argued that throwing a government lifeline to bond insurers, which have been buffeted by ratings downgrades and frozen out of the capital markets, would have "an exponentially positive impact" on the economy. In addition to guaranteeing securities, Ambac argued that Treasury should, in effect, cap the industry's losses. The company said Treasury should institute a program to limit losses above a certain level on portfolios of "entities that buy and hold credit risk." "By enabling financial guarantee insurers to cap their catastrophic losses, the guarantee program would stabilize bond insurance ratings and help restore credibility to their guarantee in the marketplace," Ambac President and CEO David W. Wallis wrote. MBIA argued that the program should cover a broad range of assets, including securities backed by auto loans, credit cards, student loans and timeshare loans. However, it said the program is "best suited" for residential mortgage-backed securities and larger pools of such securities that are sold in pieces to investors. Credit default swaps issued by bond insurers also should be eligible, the company said. Both Ambac and MBIA argued that guaranteeing whole loans would clog up the program and divert resources from insuring mortgage-backed securities. "The size of the MBS market is such that focusing on the securities alone rather than whole loans should have a significant impact on restoring market liquidity," Mr. Wallis wrote. MBIA said that other federal efforts, such as the Hope for Homeowners program and FHASecure, were better suited to dealing with whole loans. "We believe that the Treasury and the homeowner is better served by having institutions with troubled whole loans works within the parameters of the previously enacted Hope and FHA programs," the company wrote. The stance sets up a conflict with the banking industry, which sees the guarantee program as an appealing way to unclog their balance sheets without selling assets to the government. In comments to Treasury, the American Bankers Association wrote that the idea of insuring loans that can be worked out by a bank has "great merit and can potentially be implemented faster than the asset acquisition program." The bankers group argued that the guarantee program should focus first on residential and commercial mortgages, though mortgage-backed securities and other instruments could be added later. Otherwise, insuring both types of assets could impede the development of whole loan guarantees, it said. The bankers group warned Treasury to at least initially avoid insuring complex securities "that have confounded the understanding of experts and for which there may be scant data for proper risk assessments." It also said Treasury could waste taxpayer money by insuring such securities. "Insuring both whole loans, whole loan portfolios and MBS would create a redundancy, potential for overpayment of insured losses, and a resultant risk of fraud," the group wrote.
Ambac Insurance Strength Rating Lowered by Moody's (Update1) By Romaine Bostick Nov. 5 (Bloomberg) -- Ambac Financial Group Inc.'s bond insurance rating was cut four levels by Moody's Investors Service, forcing the company to post collateral and causing a cash shortfall at its financial services unit. The insurance financial strength rating was cut to Baa1 from Aa3 to reflect ``Ambac's diminished business and financial profile,'' New York-based Moody's said in a statement today. The outlook for the ratings is ``developing,'' Moody's said. Ambac's guaranteed investment contracts require it to terminate transactions or post collateral if its insurance unit is downgraded. That could leave the company with a cash shortfall of $2.8 billion, based on figures released today after the company reported a $2.43 billion net loss. Ambac Chief Executive Officer David Wallis told investors today the company would seek regulatory approval to shift money from its insurance arm to the financial services unit to bridge the gap. ``We continue to work closely with our regulators to receive permission to use the resources of Ambac Assurance to support this liquidity issue,'' Ambac Chief Financial Officer Sean Leonard said on the call. Ambac took a $2.7 billion charge in the third quarter to reflect a decline in the value of securities it had guaranteed using credit-default swaps. That type of mark-to-market loss, which doesn't always indicate an expected cash payment, this time forced the bond insurer to set aside about $2.5 billion to make good on those contracts, according to the statement. Ambac also took a charge of $607.7 million for expected claims on bonds backed by home equity loans. Ambac and the rest of the industry have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent. Ratings companies downgraded about $118 billion of prime-jumbo and Alt-A bonds in September following a record $200 billion of downgrades in August. To contact the reporter on this story: Romaine Bostick in Washington at crichard5@bloomberg.net
Ambac May Be Open to Treasury Capital Injection, Wallis Says By Margaret Popper and Christine Richard Nov. 7 (Bloomberg) -- Ambac Financial Group Inc. may be open to a capital injection by the U.S. Treasury, citing the bond insurer's ``systemic significance'' in helping improve financial markets, Chief Executive Officer David Wallis said. ``I could see some preference share injection or something like that'' in Ambac or larger competitor MBIA Inc., Wallis said in an interview today with Bloomberg Television. ``Along with that comes equity warrants and some degree of public ownership.'' Wallis stopped short of making a prediction and said Ambac has a stable business model and is ``extremely solvent.'' Ambac and its peers have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent. ``We have lots of money in the bank,'' Wallis said. ``We are absolutely a solvent entity. We are not going to Treasury with a banking problem. This is an issue in relation to getting ourselves back to the market, giving people confidence, and providing the lubricant to the markets.'' Wallis said it's unlikely the government would choose to create a federally-sponsored bond insurer to support the market. Wallis, 48, was named CEO last month, as the company fights for survival. Ambac posted a $2.43 billion third-quarter loss earlier this week triggering a four level downgrade of its credit rating by New York-based Moody's Investors Service. The cut left Ambac with a $3.2 billion cash shortfall after it was required to post collateral and terminate contracts in its investment management unit. ``We're working extremely hard in this horrendously difficult market to mediate and de-risk our portfolio,'' Wallis said. ``We do need help in accelerating the turnaround. We do need to move forward and manage the risk.'' Covering the Shortfall The company received permission from regulators to tap funds at its insurance unit to cover the shortfall and it's seeking to participate in the government Troubled Asset Relief Program. The New York-based bond insurer's financial strength rating was reduced to reflect ``Ambac's diminished business and financial profile,'' Moody's said in a statement yesterday. The outlook for the ratings is ``developing,'' Moody's said. Ambac's corporate ranking was cut to Ba1, a step below investment grade. Moody's and Standard & Poor's stripped Ambac and MBIA of their top credit ratings in June. Moody's also has MBIA's A2 rating on review for a downgrade. S&P rates Ambac AA and MBIA AA.
if ABK and MBI are solvent enough to get tarp money then who's insolvent? at least MER gets the full interest payments of CDOs and other garbage, the insurers only get a fraction of it in the form of premiums
Would anyone recommend getting in ABK now? It is cheap and has potential to pop if they are given enough money to recover. Maybe some cheap 5 or 7.50 options far away.