New York, March 26, 2010 -- Moody's Investors Service has lowered the rating of the senior unsecured
debt of Ambac Financial Group Inc. (Ambac Financial) to C from
Ca, and placed the Caa2 insurance financial strength ratings (IFSR)
of Ambac Assurance Corporation (AAC) on review for possible upgrade.
Moody's also placed the Caa2 IFSR for Ambac Assurance UK Limited
(AUK) on review with direction uncertain.
Today's rating actions may have implications for certain transactions
wrapped by AAC and AUK as discussed later in this press release.
Today's rating action was prompted by Ambac's announced restructuring.
AAC established a segregated account, containing AAC's most
risky exposures such as RMBS and Las Vegas Monorail. The Office
of the Commissioner of Insurance of the State of Wisconsin (OCI),
Ambac's regulator, has placed the segregated account under
rehabilitation. AAC also entered into a non-binding agreement
to commute all of its remaining ABS CDOs. These actions are expected
to improve the credit standing of AAC's senior unsecured policyholders
by settling the insurer's most risky exposures, and effectively
subordinating (via the segregated account) policyholders with outstanding
claims. Moody's IFSR addresses senior policy obligations
residing within AAC's general account, but not the now-subordinated
segregated account claims.
The segregated account is capitalized by a $2 billion secured note
due 2050 issued by AAC, and an aggregate excess of loss reinsurance
agreement provided by AAC. The secured note is collateralized by
installment premiums, reinsurance premiums and certain recoveries
related to the policies in the segregated account. All claims payments
related to the segregated account will be suspended, until the Segregated
Account Rehabilitation Plan is approved by the court. The OCI indicated
that the process may take about six months. The rehabilitation
plan calls for the future payment of claims out of the segregated account
to be made with a combination of cash and surplus notes.
Ambac also reached a non-binding agreement to settle ABS CDOs with
counterparties. In exchange for the termination of the ABS CDO
obligations, AAC would pay the counterparties $2.6
billion in cash, and $2 billion surplus notes issued by AAC.
The surplus notes would have the same terms as the ones issued as part
of the rehabilitation plan. Given the non-cash component
of the payments and the size of the payments compared to likely losses
that would have been sustained from these contracts, Moody's
considers this transaction to represent a distressed exchange.
RATIONALE FOR AMBAC ASSURANCE CORPORATION
The review for upgrade of AAC's financial strength rating reflects
the enhanced credit profile of general account policyholders following
the group's restructuring. Policies allocated to the segregated
account have been effectively subordinated to the policies remaining in
the general account, said Moody's. The general account's
insured book contains mainly less risky public finance securities,
largely free of legacy risks, and appears to be well supported by
the corresponding claims paying resources (such as loss reserves and unearned
premiums) and surplus notes to fund future reinsurance claims.
The surplus notes are subordinated to general account's insurance
Moody's said that the potential for upward rating movement is tempered,
however, by charges related to potential lawsuits and AAC's
inability to write new business before the full repayment of the surplus
notes. During its review, Moody's will evaluate the full
impact of the restructuring on AAC's financial strength, including
the extent to which senior unsecured policyholders of the general account
are truly insulated from segregated account losses.
Moody's believes that policies allocated to the segregated account
are no longer appropriately considered to be senior policyholder obligations
of AAC and that, consequently, Moody's insurance financial
strength rating for AAC would not apply to such exposures.
RATIONALE FOR AMBAC ASSURANCE UK LIMITED
AUK has sent AAC notices of termination with respect to AUK's reinsurance
agreement (from AAC), but per Ambac's Form 8-K filing,
AAC does not believe that AUK has a right to terminate the agreement.
AUK has demanded payment of unearned premium reserves, loss reserves,
contingency reserves and loss adjustment expense reserves related to the
reinsured policies, less ceding commissions and certain adjustments.
Currently, the liabilities of AAC under the AUK reinsurance agreement
have been allocated to the segregated account, and they are subject
to the same payment terms as the other obligations under the segregated
The review direction uncertain of AUK's Caa2 insurance financial
strength rating reflects the potential for AUK's financial profile
to either improve, if successful in its efforts to terminate the
reinsurance agreement and obtain cash in lieu of previously ceded reserves.
The rating may be lowered if such efforts are unsuccessful and its reinsurance
protection becomes further subordinated to AAC's general account
RATIONALE FOR AMBAC FINANCIAL GROUP, INC
The downgrade of Ambac Financial's senior debt rating to C,
in Moody's opinion, reflects the heightened risk of default
and very low ultimate recovery on the debt, whether through distressed
exchange or potential bankruptcy proceedings, due to the holding
company's modest cash position and limited financial flexibility.
In Moody's view, it is unlikely that the holding company will
be able to access operating company resources over a reasonable timeframe
to satisfy its obligations.
TREATMENT OF WRAPPED TRANSACTIONS
Moody's ratings on securities that are guaranteed or "wrapped" by a financial
guarantor are generally maintained at a level equal to the higher of the
following: a) the rating of the guarantor (if rated at the investment
grade level); or b) the published underlying rating (and for structured
securities, the published or unpublished underlying rating).
Moody's approach to rating wrapped transactions is outlined in Moody's
special comment entitled "Assignment of Wrapped Ratings When Financial
Guarantor Falls Below Investment Grade" (May, 2008); and Moody's
November 10, 2008 announcement entitled "Moody's Modifies Approach
to Rating Structured Finance Securities Wrapped by Financial Guarantors".
In light of today's rating actions, Moody's will position the ratings
of wrapped transactions remaining in AAC's general account,
and the ratings of transactions wrapped by AUK, according to these
criteria. If the rating of AAC or AUK should subsequently move
back into the investment grade range, or if the agency should subsequently
publish the underlying rating, Moody's would reinstate the rating
to the wrapped instruments.
Moody's insurance financial strength ratings are opinions of the
ability of insurance companies to repay punctually senior policyholder
claims and obligations and the rating agency believes that policies allocated
to the segregated account are no longer senior obligations of Ambac Assurance
Corporation. As a result, wrapped transactions allocated
to the segregated account will be rated at the published underlying rating
(and for structured securities, the published or unpublished underlying
A list of the securities wrapped by Ambac will be made available under
"Ratings Lists" at www.moodys.com/guarantors.
LIST OF RATING ACTIONS
The following ratings actions have taken place:
Ambac Assurance Corporation -- insurance financial strength to Caa2
on review for upgrade, from Caa2;
Ambac Assurance UK Limited -- insurance financial strength to Caa2
on review with direction uncertain, from Caa2;
Ambac Financial Group, Inc. -- senior unsecured debt
to C, from Ca.
The last rating action related to Ambac was on July 29 , 2009,
when Moody's downgraded Ambac's financial strength ratings
to Caa2 and Ambac Financial's ratings (senior debt to Ca).
The principal methodology used in rating Ambac was Moody's Rating Methodology
for the Financial Guaranty Insurance Industry, which can be found
at www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating Ambac can also
be found in the Rating Methodologies sub-directory on Moody's website.
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.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Moody's downgrades Ambac debt to C and reviews Caa2 insurance rating for upgrade
Senior Vice President
Financial Institutions Group
Moody's Investors Service