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12 Mar 2008
Moody's confirms Ambac's Aaa rating; changes outlook to negative
New York, March 12, 2008 -- Moody's Investors Service has confirmed the Aaa insurance financial
strength ratings of Ambac Assurance Corporation and Ambac Assurance UK
Limited. In the same rating action, Moody's downgraded
the debt ratings of the holding company, Ambac Financial Group,
Inc. ("Ambac"), by one notch (senior debt to
Aa3 from Aa2). These rating actions conclude a review for possible
downgrade that was initiated on January 16, 2008, and reflect
Moody's assessment of Ambac's ongoing efforts to strengthen its
capital position in light of its troubled mortgage and mortgage-related
CDO exposures, as well as the significant changes the company is
implementing to reduce the volatility associated with its insured portfolio
over time. According to Moody's, Ambac's recently
completed $1.5 billion capital raise was a critical factor
leading to the confirmation of the Aaa insurance financial strength ratings
at the company. The rating outlook is negative.
Based on Moody's assessment of the risks in Ambac's portfolio,
estimated stress-case losses (consistent with a scenario where
2006 subprime first-lien mortgages realize an average of 21%
cumulative pool losses, with other vintages and products stressed
accordingly) would approximate $12.1 billion. This
compares to Moody's estimate of Ambac's claims paying resources
of approximately $15 billion following the company's capital
raise, resulting in a total capital ratio of 1.24x,
which exceeds the 1.0x Aaa "minimum" level, but
is short of the 1.3x Aaa "target" level by about $700
million. Moody's further noted that in the most likely or "expected"
scenario, Ambac's insured portfolio will incur lifetime losses
of approximately $4.2 billion in present value terms,
and that Ambac's current claims-paying resources cover this
expected loss estimate by about 3.5x.
Moody's said that, as outlined in its rating methodology,
the shortfall in capitalization from the Aaa target was considered in
relation to Ambac's plans for closing the gap through a combination
of capital strengthening measures, and was determined to be consistent
with a Aaa rating. Ambac's $1.5 billion capital
raise, which consisted of $1.25 billion in common
shares and $250 million of mandatory convertible securities,
demonstrates the company's strong commitment to its policyholders.
Ambac is considering a number of initiatives that should enable it to
meet the Aaa target threshold over the next three to six months.
Moody's said that Ambac's announced common share dividend reduction
and six-month moratorium on new structured finance underwriting,
in combination with expected portfolio amortization and targeted reinsurance
strategies, should significantly contribute to that objective.
Ambac is implementing substantive changes to its underwriting and risk
management guidelines, including the discontinuation of certain
structured finance and asset management activities, as well as the
tightening of single risk limits. Moody's views this shift
in risk strategy as a very important element in the company's efforts
to reduce the volatility in its insured portfolio that has become evident
with deterioration in the US residential mortgage market.
The ability of the company to reestablish its strong market position in
the financial guaranty sector will take time. In Moody's
opinion, however, Ambac's extensive relationships with
issuers, as well as its prominent market position, expertise
and execution capabilities in several market sectors, provide the
company with a good foundation from which to regain market confidence.
INCREASED NOTCHING BETWEEN IFSR AND SENIOR DEBT RATING
Moody's stated that the increased notching between the company's
insurance financial strength rating and senior debt rating, to three
notches from two, reflects both quantitative and qualitative factors.
While Ambac's increased cash position at the holding company level
and significantly reduced common share dividend provides greater comfort
with respect to holding company liquidity, the reduction in Ambac's
capital adequacy ratios relative to historical levels and the negative
rating outlook result in incremental pressure on the debt ratings of the
holding company. Additionally, reduced prospective earnings
and statutory dividend capacity coverage of interest expense contributed
to the view that wider notching was appropriate.
RATING OUTLOOK: NEGATIVE
The negative outlook on Ambac's ratings reflects remaining uncertainties
as the company finalizes its capital plan and implements its revised strategy,
as well as uncertainty regarding the ultimate performance of its mortgage
and mortgage-related CDO exposures. Moody's believes that
Ambac's plan to regain its historically prominent position in the
financial guaranty insurance market is reasonable and that the company
is committed to maintaining a strong credit profile, although some
credit and execution risks remain in the near term, given the weakened
state of the US economy.
Moody's said that the rating outlook could return to stable within
the next six to twelve months, as visibility improves on the firm's
likely losses from mortgage-related exposures, and as the
details and effectiveness of Ambac's revised business strategy become
more apparent. A return of the rating outlook to stable would depend
on strengthening capital to meet the target Aaa benchmark, the successful
implementation of the company's announced changes to its underwriting
and risk management guidelines and significant progress in restoring issuer
and investor confidence.
LIST OF RATING ACTIONS
The following ratings have been confirmed with a negative outlook:
Ambac Assurance Corporation -- insurance financial strength at Aaa;
Ambac Assurance UK Limited -- insurance financial strength at Aaa;
The following ratings have been downgraded, with a negative outlook:
Ambac Financial Group, Inc. -- senior unsecured debt
to Aa3 from Aa2, junior subordinated debt to A1 from Aa3 and provisional
rating on preferred stock to (P)A2 from (P)A1;
Anchorage Finance Sub-Trusts I-IV -- contingent capital
securities to Aa3 from Aa2; and
Dutch Harbor Finance Sub-Trusts I-IV -- contingent
capital securities to Aa3 from Aa2.
OVERVIEW OF AMBAC
Ambac Financial Group, Inc. (NYSE: ABK), headquartered
in New York City, is a holding company whose affiliates provide
financial guarantees and financial services to clients in both the public
and private sectors around the world. For the year ended December
31, 2007, Ambac reported a net loss of approximately $3.3
billion. As of December 31, 2007, Ambac had shareholders'
equity of approximately $2.3 billion.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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