Thursday, 17 January 2008

AMBAC Just Postponing The Inevitable

Ambac Will Cut Dividend, Raise $1 Billion in Capital

Ambac Financial Group Inc. replaced its chief executive officer, slashed the dividend 67 percent and will raise more than $1 billion to preserve its AAA credit rating after announcing the biggest-ever writedowns by a bond insurer.

Ambac, the second-largest insurer of municipal and structured finance debt, fell the most ever on the New York Stock Exchange, extending a 76 percent decline from the past 12 months. Ambac will report a loss after reducing the value of securities it guarantees by $3.5 billion, according to a statement today.

More Capital?

Ambac, which put its AAA stamp on $556 billion of securities, probably will need more capital because the quality of the debt it guarantees will drop, Tavakoli said. Standard & Poor's today said it plans to re-examine the bond insurer ratings after increasing its assumptions for losses on subprime mortgages.

Until 2007, insuring debt allowed Ambac to increase earnings and dividends every year for the past decade. Net income, which rose 17 percent in 2006 to $875.9 million, probably fell in 2007.

Ambac cut its quarterly dividend to 7 cents from 21 cents, three weeks after stating in a regulatory filing that the payout will remain unchanged. The company will report a fourth-quarter loss of $32.83 a share when it releases earnings Jan. 22. The loss equates to more than $3 billion based on the 101 million shares outstanding.

3 weeks ago the dividend was safe now it's been slashed 67%. Doesn't exactly inspire confidence. This could potentially be the last dividend this company pays.

'A Down Payment'?

Ambac's writedowns, which exceeded those announced last week by MBIA, failed to convince analysts that the worst is over.

"It's one thing to have a plan and another to have a plan that is credible and will be a long-term fix,'' said Donald Light, an analyst with Boston-based consulting firm Celent. "Is this just a down payment in what's going to be a series of payments of uncertain length?''

Yes Donald, it's not going to be nearly enough capital in the long term. Although the $1 billion equity raising will be enough to keep their AAA rating from Fitch, the ratings agencies keep shifting the goal posts.

S&P Will Review Bond Insurers With New Assumptions

Standard & Poor's will start a new examination of bond insurers, one month after affirming the companies' AAA ratings, because losses on subprime mortgages will worse than the firm anticipated.

The ratings company will examine whether insurers including MBIA Inc. and Ambac Financial Group Inc. have enough capital to withstand reductions in the ratings of the mortgage-backed securities they guarantee. The credit test will be completed within a week, said Mimi Barker, a spokeswoman in New York. "The rating agencies have lost as much credibility as the bond insurers,'' said Richard Larkin, a municipal bond analyst with JB Hanauer & Co. in Parsippany, New Jersey. "Every time you turn around they're changing their minds about what's going to happen in the subprime mortgage market.''

Mr Larkin is dead right, as mentioned here numerous times the ratings agencies have been hopelessly behind the curve. Getting back to the first point, is $1 billion really going to fix AMBAC's problems? Not according Bill Ackman who has been shorting the stock for months and has recently decided to short even more shares of Ambac.

The interview below is well worth the watch, Ackman believes AMBAC could need to raise as much as $10 billion or more just to stay afloat.

This company is going the way of Countrywide, either being bought out for a fraction of book value or filing for chapter 11. At least Countrywide had a huge branch network of value, I'm not sure what AMBAC has to offer potential investors.