Ambac Gets $1.5 Billion in Capital Raising to Keep AAA Rating

Ambac Gets $1.5 Billion in Capital Raising to Keep AAA Rating

March 7 (Bloomberg) -- Ambac Financial Group Inc. raised $1.5 billion in a sale of shares and convertible units, more than doubling its outstanding stock to salvage its AAA credit rating.

Ambac, the world's second-largest bond insurer, sold 185.2 million common shares at $6.75, raising $1.25 billion, according to data compiled by Bloomberg. The shares were sold at 9 percent less than yesterday's close of $7.42. New York-based Ambac also sold $250 million of units convertible into shares in 2011, according to a person with knowledge of the sale.

While the sale will dilute the ownership of common shareholders, the offering probably will be enough to convince New York-based Moody's Investors Service and Standard & Poor's to affirm Ambac's top rating. The companies threatened to downgrade Ambac, putting at risk the credit ratings of $556 billion of municipal and asset-backed securities Ambac insures.

``They might be able to maintain the ratings at Moody's and S&P for the time being, but it's a Band-Aid,'' Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York, said in an interview with Bloomberg Television. Haines said the market was looking for Ambac to raise double the $1.5 billion the company raised.

Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG managed the sale. The shares have fallen 95 percent since May, giving the company a market value of about $754 million at the close of trading on the New York Stock Exchange yesterday.

Ambac fell $1.28, or 14.7 percent, yesterday before the sale. The shares have tumbled 92 percent in the past year, reducing the company's market value to about $754 million at the close of trading today. The units carry a yield of 9.5 percent and are convertible at $18 a share, said the person, who declined to be identified because the terms haven't been officially released.

CDO Guarantees

Ambac said earlier this week that it planned to sell $1 billion of common shares and $500 million of convertible units.

Most of the bond insurance industry, including Ambac and its larger competitor MBIA Inc., stumbled after expanding beyond municipal insurance to guarantees on collateralized debt obligations or CDOs that have since plunged in value. CDOs package pools of securities then split them into pieces with different ratings.

In addition to selling shares, Ambac plans to raise capital by cutting its dividend to 1 cent from 21 cents a share and suspend its business of writing guarantees on many kinds of bonds, including those backed by mortgages.

The loss of Ambac's top rating would cast doubt on the more than half a trillion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt.

Abandoned Sale

Ambac abandoned a plan to sell shares 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.

Some analysts said earlier in the day that the revived offering wouldn't be enough to stabilize Ambac's ratings.

``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.

BLOOMBERG