Ambac to Sell Half the Company; Bet May Not Pay Off (Update7)
By Christine Richard and Bryan Keogh
March 6 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors said won't pay off.
Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011.
Investors had anticipated Ambac would be bailed out by banks, which would pledge their own funds to support a capital raising of as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the company announced it would raise half that amount in a transaction that would push down the value of its stock.
``The new offering is highly diluting to existing shareholders,'' said Jim Ryan, an insurance analyst at Morningstar Inc., said in an interview with Bloomberg Television. ``The market was looking for a backstop, to say the least.''
The sale of common stock, managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, is scheduled for tonight, according to data compiled by Bloomberg.
Shares Fall
Ambac fell $1.28, or 14.7 percent, to $7.42 today in New York Stock Exchange composite trading. The shares have tumbled 95 percent since May, reducing the company's market value to $754 million.
CNBC reported that banks would step up to buy unsold shares. Reuters reported that banks had committed to buying more than half of the shares. Both cited unnamed sources.
``Given the sensitivity over this name, any support should be explicitly explained to the market,'' said Robert Haines, an analyst with CreditSights Inc. in New York.
Duncan King, a spokesman for Credit Suisse Holdings US in New York, and Stephen Cohen, a spokesman for Citigroup Global Markets, declined to comment.
By proposing a sale of common shares, Ambac is reverting to a plan it abandoned in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock, and canceled the offering Jan. 18.
``Based on our estimate that Ambac will eventually absorb about $11 billion of losses from insured CDOs and mortgage-backed securities related exposures, $1.5 billion of new capital at first blush does not seem like enough to fix the capital adequacy problem,'' Andrew Wessel, an analyst at JPMorgan Securities in New York, said in a March 6 research report. CDOs, or collateralized debt obligations, package pools of securities then split them into pieces with different ratings.
Dividend Cut
Ambac cut its dividend to 1 cent from 21 cents a share and said it will suspend writing guarantees on debt, including mortgage-backed bonds. The combined plans will probably bolster capital enough for an AAA rating, Moody's and S&P said yesterday.
Stock investors were ``expecting something different in terms of some type of a more orchestrated event that looked less like a conventional offering of common stock and more like a carefully crafted infusion from business partners,'' said Colin Glinsman, who oversees about $25 billion as chief investment officer at Oppenheimer Capital in New York.
Credit Default Swaps
Credit-default swaps tied to Ambac's AAA rated insurance unit rose 45 basis points to 570 basis points, the highest in three weeks, according to CMA Datavision in London. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
Ambac, its larger competitor MBIA Inc., and the rest of the industry stumbled after expanding beyond municipal insurance to guarantees on CDOs that have since tumbled in value. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt.
The loss of Ambac's top rating would cast doubt on $556 billion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings.
Bank Losses
MBIA retained its top rating after the Armonk, New York- based company raised $3 billion, agreed to stop insuring asset- backed debt for at least six months and said it would separate its municipal and structured finance businesses within five years.
Banks would lose as much as $70 billion if the top-rated bond insurers lose their credit ratings, Oppenheimer & Co. analysts estimated in January. MBIA's ratings were affirmed by Moody's and S&P last week.
Banks bought bond insurance to hedge the risks of CDOs and other asset-backed securities they own.
After Ambac canceled initial plans for a sale, eight banks formed a group to help the company find new ways to raise money. The banks' chances of losses caused investors to speculate they would do more to help Ambac raise money.
``The word we kept hearing was bailout,'' Paul Brennan, who helps manage about $12 billion of municipal bond funds at Nuveen Asset Management in Chicago, said in a Bloomberg Television interview. ``While this is a positive development, they do need more capital, it's not really what we would consider a bailout plan.''
By Christine Richard and Bryan Keogh
March 6 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors said won't pay off.
Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011.
Investors had anticipated Ambac would be bailed out by banks, which would pledge their own funds to support a capital raising of as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the company announced it would raise half that amount in a transaction that would push down the value of its stock.
``The new offering is highly diluting to existing shareholders,'' said Jim Ryan, an insurance analyst at Morningstar Inc., said in an interview with Bloomberg Television. ``The market was looking for a backstop, to say the least.''
The sale of common stock, managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, is scheduled for tonight, according to data compiled by Bloomberg.
Shares Fall
Ambac fell $1.28, or 14.7 percent, to $7.42 today in New York Stock Exchange composite trading. The shares have tumbled 95 percent since May, reducing the company's market value to $754 million.
CNBC reported that banks would step up to buy unsold shares. Reuters reported that banks had committed to buying more than half of the shares. Both cited unnamed sources.
``Given the sensitivity over this name, any support should be explicitly explained to the market,'' said Robert Haines, an analyst with CreditSights Inc. in New York.
Duncan King, a spokesman for Credit Suisse Holdings US in New York, and Stephen Cohen, a spokesman for Citigroup Global Markets, declined to comment.
By proposing a sale of common shares, Ambac is reverting to a plan it abandoned in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock, and canceled the offering Jan. 18.
``Based on our estimate that Ambac will eventually absorb about $11 billion of losses from insured CDOs and mortgage-backed securities related exposures, $1.5 billion of new capital at first blush does not seem like enough to fix the capital adequacy problem,'' Andrew Wessel, an analyst at JPMorgan Securities in New York, said in a March 6 research report. CDOs, or collateralized debt obligations, package pools of securities then split them into pieces with different ratings.
Dividend Cut
Ambac cut its dividend to 1 cent from 21 cents a share and said it will suspend writing guarantees on debt, including mortgage-backed bonds. The combined plans will probably bolster capital enough for an AAA rating, Moody's and S&P said yesterday.
Stock investors were ``expecting something different in terms of some type of a more orchestrated event that looked less like a conventional offering of common stock and more like a carefully crafted infusion from business partners,'' said Colin Glinsman, who oversees about $25 billion as chief investment officer at Oppenheimer Capital in New York.
Credit Default Swaps
Credit-default swaps tied to Ambac's AAA rated insurance unit rose 45 basis points to 570 basis points, the highest in three weeks, according to CMA Datavision in London. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
Ambac, its larger competitor MBIA Inc., and the rest of the industry stumbled after expanding beyond municipal insurance to guarantees on CDOs that have since tumbled in value. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt.
The loss of Ambac's top rating would cast doubt on $556 billion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings.
Bank Losses
MBIA retained its top rating after the Armonk, New York- based company raised $3 billion, agreed to stop insuring asset- backed debt for at least six months and said it would separate its municipal and structured finance businesses within five years.
Banks would lose as much as $70 billion if the top-rated bond insurers lose their credit ratings, Oppenheimer & Co. analysts estimated in January. MBIA's ratings were affirmed by Moody's and S&P last week.
Banks bought bond insurance to hedge the risks of CDOs and other asset-backed securities they own.
After Ambac canceled initial plans for a sale, eight banks formed a group to help the company find new ways to raise money. The banks' chances of losses caused investors to speculate they would do more to help Ambac raise money.
``The word we kept hearing was bailout,'' Paul Brennan, who helps manage about $12 billion of municipal bond funds at Nuveen Asset Management in Chicago, said in a Bloomberg Television interview. ``While this is a positive development, they do need more capital, it's not really what we would consider a bailout plan.''