| Reuters - January 19, 2008
A unit of Ambac Financial Group Inc. lost a crucial top AAA credit rating Friday, raising questions about the bond insurer's ability to win new business and possibly forcing some investors to sell billions of dollars of municipal bonds and other securities guaranteed by the company.
Fitch Ratings cut Ambac Assurance Corp.'s top rating after the bond insurer, citing weak demand, scrapped plans to sell $1 billion of new equity. Ambac, the world's No. 2 bond insurer, needs new capital after recognizing losses on its coverage of repackaged consumer debt whose value has declined in the wake of the sub-prime mortgage crisis.
Other rating firms may follow Fitch's move.
Standard & Poor's said Friday that it might cut Ambac's ratings. Moody's Investors Service said the same Wednesday.
Fitch cut Ambac Assurance's rating to AA, the third-highest rating, from AAA. It also downgraded the parent company's long-term rating three notches to A from AA. More rating cuts are possible, Fitch said.
As a result of the downgrade, Fitch also took action on 137,000 bonds insured by Ambac, the vast majority of which are municipal bonds.
Debt with underlying ratings above Ambac's AA rating will retain the higher ratings, and issues rated AA or below will now take the same rating as Ambac.
A total of 420 classes of asset-backed securities guaranteed by Ambac were also cut to AA.
Other bond insurers, including market leader MBIA Insurance Corp., could face downgrades.
Issuers will now be reluctant to pay for Ambac's bond insurance, which is normally used to turn lower-rated securities into top-rated bonds.
As downgrades of bond insurers come in, fixed-income investors that can own only top-rated instruments will have to sell securities insured by the downgraded firms, pushing bond values lower. Such investors include many bond funds, insurance companies and bank trust departments.
Fitch issued its downgrade late in the stock-trading day, after the bond market had closed for a three-day holiday weekend
Bank of America Corp. on Friday cut its ratings on the shares of three bond insurers -- MBIA, Ambac and Security Capital Assurance Ltd. -- to "neutral" from "buy."
Shares of MBIA sank 67 cents, or 7%, to $8.55 after a sharp drop Thursday.
But Ambac, which plunged 51% on Thursday, fell only 4 cents Friday to $6.20.
Security Capital shares dropped 17 cents, or 9%, to $1.65 on Friday.
Ambac said Wednesday that it planned to issue $1 billion of equity or convertible securities after estimating it would have to record $3.5 billion in after-tax losses on credit derivatives, reducing its shareholders' equity, or assets minus liabilities, by two-thirds.
On Friday, Ambac said it continued to evaluate alternatives and remained confident of its insured portfolio.
The company could try other ways to raise capital, such as selling itself or buying reinsurance.
But analysts said those options were unlikely to work out.
Buying Ambac would entail taking on big potential liabilities that would be hard to estimate. Ambac, based in New York, insures $556 billion of bonds.
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