US Financials Slump As Bond Insurer Ambac Hit by Fresh Subprime Losses

Ambac shares hit after $3bn loss warning
By Aline van Duyn and Stacy-Marie Ishmael in New York
Wednesday Apr 23 2008 12:50
Financial Times

Ambac Financial (NYSE:ABK) lost more than a third of its stock market value on Wednesday as the bond insurer warned that potential losses related to mortgage-backed securities could reach more than $3bn, vastly more than expected.

The company's ability to retain its crucial triple A credit ratings is again under question amid concerns that credit ratings agencies may require Ambac to raise a new round of fresh capital. (The fact that they even have it is the equivalent of a financial blasphemy in taking the name of creditworthiness in vain - Jesse)

Tamara Kravec, analyst at Bank of America, said: "It is realistic to assume that Ambac could fall short of ratings agency capital requirements.

"Concerns over the prospects for new business and a cloud of uncertainty over the magnitude of future potential [mortgage] losses will likely continue to put pressure on the shares."

Shares in Ambac fell to their lowest level. By midday in New York, the shares were down 35 per cent to $3.90. MBIA (NYSE:MBI) , the biggest bond insurer, was also hit, and its shares fell nearly 24 per cent to $10.15.

The potential knock-on effects of downgrades have caused concerns for regulators and banks. Bonds worth more than $1,000bn are guaranteed by Ambac and MBIA, and these could be downgraded if they lose their triple A ratings.

Ambac raised $1.5bn in capital last month, just in time to stave off cuts to its triple A ratings by Moody's Investors Service and Standard & Poor's. Fitch Ratings has cut Ambac's rating to double A, and all the agencies have a "negative outlook" for the group.

Ambac's first-quarter net loss of $1.7bn, or $11.69 a share, compared with a net income of $213m, or $2.04 a share, in the same period a year ago. Analysts polled by Thomson Financial forecast a loss of $1.51 a share in the first quarter.

The bond insurer incurred $940.4m in losses on collateralised debt obligations backed primarily by residential mortgages, and a total mark-to-market loss on credit derivative exposures of $1.7bn. CDOs are pools of debts that are sliced into tranches of varying risks and returns.

Ambac, which said it had been "severely impacted" by sharp declines in the value of mortgage securities, will also reserve $1bn to provide against further losses on these securities.

Michael Callen, interim chief executive of Ambac, admitted that "earlier expectations have turned out to be optimistic".

He said it was still not possible to be certain how large losses on mortgage-backed assets would be, amid continuing high levels of foreclosures across the US.

The uncertainty over the bond insurer's health and strategic direction has undermined its core business - guaranteeing debt issued by lower-rated municipalities, such as schools and local governments.

Ambac's shares had already lost more than 90 per cent of their value before the results.

Mr Callen said "the capital raised and strategic business actions taken during the quarter will enable us to get beyond this credit market."

Ambac Financial Hit By Subprime Losses