Ambac May Get $3 Billion in New Capital, Person Says

Ambac May Get $3 Billion in New Capital, Person Says

Feb. 23 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer facing a crippling credit-rating downgrade, may get $3 billion in new capital as part of a rescue agreement with banks, according to a person with knowledge of the discussions.

An announcement may come early next week, said the person, who declined to be named because no details have been set. The New York-based company rose 16 percent in New York Stock Exchange trading yesterday after CNBC Television said Ambac and its banks were preparing a deal.

A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guarantees would help banks and municipal debt investors avoid losses on securities it insures. Banks stood to lose as much as $70 billion if the top- rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.

``It's been on the table for a while and if it happens it will certainly be a good thing for any bond insurer that gets a capital infusion,'' said Donald Light, a senior analyst covering insurance at Celent, a consulting firm in Boston.

Ambac spokeswoman Vandana Sharma declined to comment specifically on the discussions.

``Everything is being considered,'' Sharma said in a telephone interview. ``These are complicated things. We hope to have something shortly.'' She wouldn't discuss any specific plans.

Banks Involved

Eight banks including Citigroup Inc. and UBS AG formed a group to consider providing financing, a person familiar with the matter said earlier this month. Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, were also involved, said the person, who declined to be named because details hadn't been set.

The banks face losses because they bought bond insurance to hedge the risks of collateralized debt obligations and other asset-backed securities that are now tumbling in value. CDOs package pools of securities then split them into pieces with different ratings.

Spokespeople for Citigroup, UBS, Wachovia and BNP declined to comment on the rescue plans. Spokespeople for RBS, Barclays, Societe Generale and Dresdner didn't immediately return e-mails or calls seeking comment.

The bond insurers and banks are working against the clock. Moody's Investors Service indicated it will decide whether to downgrade Ambac and Armonk, New York-based MBIA by the end of the month. A downgrade of all the insurers would cast doubt over $2.4 trillion of securities they back. Losses on the subprime- mortgage securities they guaranteed prompted the ratings companies to demand the insurers add more capital or face downgrades.

Dividing Businesses

New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing last week the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.

``We continue to be engaged in and fully supportive of the bond insurers' ongoing efforts to resolve their current problems,'' Andy Mais, a spokesman for Dinallo, said in an e- mail.

FGIC, which lost its top rating at Moody's last week, asked to be split into two separate business, one that insures municipal bonds and another for asset-backed securities. That would help protect municipal bonds from losses on the asset- backed debt.

Reinsurer's Rating Cut

Channel Reinsurance Ltd., a reinsurer for MBIA, had its top Aaa credit rating cut by Moody's yesterday because of a slump in the value of residential mortgage securities.

The rating was cut three levels to Aa3 with a negative outlook, Moody's said in a statement. Channel Re provides more than half the reinsurance bought by MBIA, according to MBIA filings.

MBIA yesterday said all bond insurers must eventually divide their businesses. Ambac is also considering options that may include a split, Sharma said.

``When you have a company going through extraordinary times and challenging times and volatile times to take any option off the table is not a good way to run a company,'' Sharma said.

Ambac, which was already downgraded by Fitch, lends its credit rating to $376.6 billion of municipal and international bonds and $176.6 billion of structured finance debt, including CDOs, according to its Web site.

Shares Soar

Ambac, down 88 percent in the past year, jumped $1.48 to $10.71 in New York trading. Ambac is also considering raising money from shareholders, the Financial Times reported.

Credit-default swaps tied to Ambac's bond-insurance unit fell 5 basis points to 406 basis points, according to CMA Datavision in London.

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 if a borrower fails to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Ambac isn't having any trouble meeting claims, Sharma said.

``To me, a bailout means a company that is struggling to meet its obligations,'' Sharma said. ``We're in no need of a bailout.''

BLOOMBERG