Ambac’s share price hit an all-time low on Wednesday, falling below $1 a share for the first time in the company’s history as a public company.
Why? A rather savage downgrade from S&P, which cut the bond insurer’s financial strength rating to A from AA, The outlook on the ratings is negative, meaning further cuts are likely in the medium term.
S&P’s rationale (emphasis FT Alphaville’s):
The rating action on Ambac reflects our view that the company’s exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation (CDO) structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company to the potential for further adverse loss development.
These losses have slightly more than offset the benefits to the company of lower capital requirements that result from a declining book of business.
In addition, to support funding needs at affiliate Ambac Capital Funding Inc., a provider of investment agreements, to meet increased collateralization and termination requirements, Ambac has purchased assets from and made loans to the affiliate that have lowered slightly the credit quality of Ambac’s investment portfolio and increased the gap between the book value and fair market value of the assets in the portfolio.
Nevertheless, in our opinion, the company still exhibits sound claims-paying ability at its current rating and adequate liquidity levels…
The negative outlook reflects our view that Ambac’s exposure to domestic nonprime mortgages and related exposures to CDO of ABS have likely damaged its franchise and that the company faces extremely limited new business flow.
The move comes two weeks after Moody’s cut Ambac to Baa1, which is two notches lower than S&P’s rating. The Moody’s downgrade required the insurer to post collateral and to move money from its financial guarantee arm to its investment unit.
The outlook for the bond insurance industry is, flatly, bleak. Per RBS analyst Michael Cox this morning:
Several of the protagonists in the monoline story are experiencing death-throes. Syncora was only a reserve release away from breaching minimum statutory capital requirements. FGIC is barely better. Ambac and MBIA continue to see their ratings hacked at by the rating agencies. Even FSA, previously viewed as the safest of the major names, has had to fall into the arms of a rival in an attempt to prevent being subjected to the same treatment.
A moment of silence, please…
Related links:
Ambac and MBIA suffer major losses - FT
Bond insurers try to tap Treasury plan - Bloomberg
