Thursday, April 24, 2008

Can Ambac Raise More Capital After Reporting Loss?

Ambac's $1.66 billion loss for the three months ended March 31, announced yesterday, sent the shares tumbling 43 percent and sparked concerns that the company's AAA credit rating isn't as safe as investors thought. Goldman Sachs Group Inc. analyst James Fotheringham estimates Ambac and larger rival MBIA Inc. may need to raise $3.4 billion each to fill capital shortfalls.

Ambac in March sold stock after suffering more than $5 billion of charges on its guarantees of mortgage-liked debt. The offering was enough to persuade Moody's Investors Service and Standard & Poor's to take New York-based Ambac's AAA rating off review, averting a downgrade that would have crippled its ability to guarantee bonds and removing the broader threat of losses for the $524 billion of municipal and asset-backed debt the company insures.

The housing and credit-market slump pushed Ambac to three straight net losses after more than a decade of quarterly profit. The bond insurer posted a record loss in the fourth quarter of $3.3 billion, or $31.85 a share, largely on writedowns of $5.2 billion.

Ambac, which also cut its dividend to preserve capital, sold 171.1 million shares at $6.75 each on March 6. At the time, the sale more than doubled the stock outstanding. The shares soared 28 percent the next day on optimism the company had averted a downgrade.

Ambac slumped to $3.46 in New York trading yesterday, taking the company's market value to less than $1 billion. The shares closed up 30 cents to $3.76 in New York Stock Exchange trading. Ambac is down 96 percent in the past year.

Credit-default swaps that protect against the risk Ambac's AAA rated insurance unit won't make good on its debt payments soared to an upfront price of 11 percentage points and 5 percent a year for 5 years, up from about 7 percentage points a year yesterday, according to London-based CMA Datavision. Contracts tied to Armonk, New York-based MBIA's insurance unit climbed 87 basis points to 805 basis points.

Concern that bond insurers may be in for larger losses than previously thought sent MBIA shares down $4.49, or 34 percent, to $8.79 yesterday. MBIA spokesman Jim McCarthy declined to comment. The stock rose $1.01 to $9.80 today.

Goldman's Fotheringham, who is based in New York, reduced his share price target for Ambac to $2 from $7 and said MBIA probably will trade at $8 in 12 months, down from an estimate of $12. Ambac will likely have total pretax losses of $11.8 billion, Fotheringham wrote in a note to clients today, and MBIA's losses will probably reach $12.6 billion.

Fotheringham also reduced his estimates for Ambac in 2008 to a loss of $18.05 a share, from a profit of 95 cents. He cut his prediction for MBIA to a loss of $21.75 a share from a loss of $1.81.

Without the money from the March sale, Ambac's capital levels would have been ``materially impaired,'' Haines said. He didn't say how much the company may need to raise.

We question its ability to access the capital markets anytime soon, without which an outright downgrade from Moody's and S&P may be unavoidable,'' Haines said.
How, pray tell, and at what cost?

Despite these rather uncomfortable facts, Callen asserts that the ratings are "solid'. Fitch doesn't think so and already downgraded Ambac to AA. Rating agency Egan Jones doesn't think so and has been a long-time critic of the bond guarantors. The credit default swaps market doesn't think so. Even New York State insurance superintendent Eric Dinallo has doubts. And Bill Ackman at Pershing Square certainly doesn't agree.

And the last time I recall a company saying its liquidity was fine was Bear, and at least at the time of its crunch, Bear's long-term prospects looked better than Ambacs' do (there is still ample debate as to whether Bear was insolvent or not: the answer in most cases depends on one's view of the credit default swaps market). Source