Thursday, 6 March 2008

AMBAC Underwhelms the Market with Bailout Plan

In one of the biggest anti-climaxes in recent times AMBAC underwhelmed the market with it's proposed recapitalization plans in attempt to keep its fictitious AAA rating alive. From

Ambac to raise $1.5 bln selling stock, equity units

Ambac Financial said Wednesday that it plans to raise at least $1.5 billion selling new common stock and equity units as the troubled bond insurer tries to keep its crucial AAA rating.

Ambac shares dropped 19% to $8.70 after the announcement. Investors worried about being diluted by the offering and about the lack of participation in the deal by banks that are big counterparties to the bond insurer.

Ambac (ABK) is aiming to raise at least $1 billion selling common stock and another $500 million selling equity units. The common stock offering is fully subscribed, according to a person familiar with the situation.

Click on the link for the full story. The banks avoided stumping up capital for the deal and have thus given the plan a big vote of no confidence. The Wall Street Journal summed up the market's reaction well:

Selling Ambac’s News

So that’s it, huh?

Ambac Financial Group let the dogs out, announcing plans to raise $1 billion in common stock and about $500 million in equity units, and, uh, well, that was about it.

The market clearly was expecting more — Ambac shares were up 5.9% prior to getting halted at 1:31 p.m. ET, and when trading in the shares resumed a minute ago, the stock fell sharply, lately down 9%. The Dow Jones Industrial Average, which was up modestly before the news, was lately down 45 points, and other major indexes have dipped into negative territory as well.

“I’m not sure what people were expecting, but it’s definitely why we sold off,” says Todd Leone, head of listed trading at Cowen & Co. “It was at $11, now it’s trading at $9, and the market sold off on it.”

The monoline insurer also plans on getting out of a number of bad businesses that have put the company in the position it currently finds itself in — such as mortgage-backed securities, auto loans and credit-card receivables. But a decision to stop writing insurance for businesses that have already cost the company wasn’t going to assuage investors today, who were looking for more.

Ambac said it doesn’t expect to regain its triple-A rating from Fitch, but hopes to maintain the triple-A ratings garnered by Moody’s and Standard & Poor’s.

And so the charade continues. AAA ratings mean absolutely nothing, although we've known that for a while. Credit spreads show that the credit markets haven't believed AMBAC's rating for months and now the stockmarket is in agreement.