Ambac decides against splitting
By Aline van Duyn and Ben White in New York
Published: March 4 2008 02:59 | Last updated: March 4 2008 02:59
Ambac, the troubled bond insurer, has decided against splitting in two as it completes a $2bn-$3bn recapitalisation, insiders said.
Under a recent proposal, Ambac, the second biggest bond insurer, or monoline, would have split its operations into a triple-A-rated municipal bond insurance business and a structured finance business with potentially lower ratings. A lower rating on the structured part of its business could have forced banks to reduce the value of guarantees on collateralised debt obligations and on derivative trades.
There was also the possibility of lawsuits by banks and other groups that bought insurance on CDOs and other structured products. Eight banks, led by
Citigroup and
UBS, which between them bought the most guarantees from Ambac, are together preparing to inject $2bn or more into the monoline, which has been racing to come up with fresh capital to avoid a sharp cut in its triple-A rating.
The capital infusion, which is likely to include other investors beside the banks, could be announced as early as Wednesday, people involved in the talks said. The deal is expected to result in Ambac remaining a single entity with a triple-A rating.
Although Ambac’s past guarantees are expected to remain together, its future business is likely to be different. Ambac announced late last week that it had slashed dividends and would stop providing insurance on structured finance deals for at least six months.
The moves, similar to those announced by MBIA, the biggest bond insurer, which has been grappling with a lack of investor confidence in its financial strength, are designed to preserve capital. Ambac said halting its structured business for six months would free up $600m in additional capital, for example.
Bond insurers have for decades provided triple-A stamps of approval to hundreds of billions of dollars of municipal debt. They have broadened their business to guarantee structured debt, including bonds backed by mortgages. The spikes in mortgage foreclosures this year have resulted in unexpected losses for bond insurers.
In spite of efforts by regulators to prevent downgrades of monolines, municipal bond yields have risen to historic highs compared with US Treasuries in the past week. This could lead to sharply higher borrowing costs for municipalities across the US.
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/45dc462c-e980-11dc-8365-0000779fd2ac.html
