In a story posted last week on Bloomberg.com, Christine Richard and Elizabeth Hester reported that the world’s second-largest bond insurer, Ambac Financial Group, Inc., managed to raise about $1.5 billion through sales of shares and convertible units. This capital infusion, which more than doubled the amount of outstanding stock, may have salvaged Ambac’s AAA credit rating. Even though the sale diluted the ownership of existing shareholders, the offering was probably enough to convince Moody’s and Standard & Poor’s to maintain Ambac’s rating. Ambac CEO Michael Callen said existing shareholders, new investors, private-equity firms and banks all purchased stock in the offering.
Cerberus Capital Management LP, a private-equity firm based in New York, invested $50 million in the equity units. Banks purchased $405 million of common stock for 40 percent of the shares. Ambac spokesman Paul Burke said that the Royal Bank of Scotland and BNP Paribas purchased $95 million of shares through a private placement.
Ambac’s credit worthiness was threatened earlier in the quarter after the company posted record losses because of subprime-mortgage securities. Prior to the sale, the credit ratings of some $556 billion of municipal and asset-backed securities were at risk.
In addition to selling shares, Ambac plans to bolster its capital further by cutting its dividend by 1 cent. Ambac also intends to suspend its business of writing guarantees on many types of bonds including those backed by mortgages.
Even though the amount of capital raised was impressive, it was not enough to quiet all of Ambac’s critics. “They might be able to maintain the ratings at Moody’s and S&P for the time being, but it’s a Band-Aid,” said Robert Haines, an analyst at CreditSights Inc. According to Haines, Ambac’s fundraiser only amounts to half of what the market was looking for the company to raise.
Andrew Wessel, an analyst at JP Morgan Securities, says his firm estimates that Ambac will “eventually absorb about $11 billion of losses from insured CDOs and mortgage-backed securities related exposures.” Wessel agreed with Haines, noting that “$1.5 billion of new capital at first blush does not seem like enough to fix the capital adequacy problem.”
Time will tell whether the critics or the ratings agencies are correct with respect to Ambac’s future.