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19 Jun 2008
Moody's downgrades Ambac to Aa3; outlook is negative
New York, June 19, 2008 -- Moody's Investors Service has downgraded to Aa3, from Aaa,
the insurance financial strength ratings of Ambac Assurance Corporation
("Ambac") and Ambac Assurance UK Limited. In the same
rating action, Moody's also downgraded the debt ratings of
Ambac Financial Group, Inc. (NYSE: ABK -- senior
unsecured debt to A3 from Aa3) and related financing trusts. Today's
rating action concludes a review for possible downgrade that was initiated
on June 4, 2008, and reflects Moody's views on Ambac's
overall credit profile in the current environment, including the
company's significantly constrained new business prospects,
its impaired financial flexibility and increased expected and stress loss
projections among its mortgage-related risk exposures relative
to previous estimates. The outlook for the ratings is negative,
reflecting uncertainties regarding the company's strategic plans
going forward, as well as the possibility of further adverse developments
in its insured portfolio. Moody's noted, however,
that these risks are mitigated somewhat by the company's substantive
capital cushion at the current rating level and that this was an important
consideration in arriving at the Aa3 insurance financial strength rating.
As a result of today's rating action, the Moody's-rated
securities that are guaranteed or "wrapped" by Ambac are also downgraded
to Aa3, except those with higher public underlying ratings.
A list of these securities will be made available under "Ratings Lists"
Moody's said that the uncertainty about the ultimate performance
of Ambac's mortgage-related exposures continues to adversely
affect market perceptions of the firm, greatly impairing its financial
flexibility and ability to write new business. Ambac has recorded
more than $3.3 billion of cumulative loss reserves and credit
impairments on its mortgage-related portfolio, mostly related
to recent vintage second-lien and Alt-A RMBS and ABS CDOs.
Moody's noted that Ambac has written little new business in the
last few months. Furthermore, the company's financial
flexibility has deteriorated substantially since its $1.5
billion capital raise in March 2008, as evidenced by the profound
decline in Ambac's market capitalization and high current spreads
on its debt securities, making it extremely difficult to economically
address potential capital shortfalls should markets continue to worsen.
Moody's has re-estimated expected and stress loss projections
on Ambac's insured portfolio, focusing on the company's
mortgage-related exposures, as well as other sectors of the
portfolio potentially vulnerable to deterioration in the current environment.
Based on Moody's revised assessment of the risks in Ambac's
portfolio, estimated stress-case losses would approximate
$12.1 billion at the Aaa threshold and $9.6
billion at the Aa3 threshold. This compares to Moody's estimate
of Ambac's total claims paying resources of approximately $15.4
billion. Moody's noted that its stress case estimates for
Ambac's residential mortgage-related exposures increased
by roughly $200 million to $5.6 billion, which
was largely offset by insured portfolio amortization since year-end
2007. Relative to Moody's 1.3x "target"
level for capital adequacy, Ambac is currently $225 million
below the Aaa target level and is approximately $3 billion above
the Aa3 target level.
Moody's said that, beyond Ambac's affected mortgage-related
exposures, portfolio risks appear to be well-contained as
reflected by its core low-risk municipal book and high average
underlying ratings. Most non-mortgage-related structured
segments are performing well, although certain exposures,
such as private student loans, may be more sensitive to economic
or sector deterioration. While portfolio losses could increase
in a sharp economic downturn, strong premium accretion, investment
earnings and portfolio amortization should help to offset any resulting
impact on capital adequacy. Moody's noted, however,
that downward rating pressure could occur if Ambac's capital cushion
at the current rating level were to be materially eroded through the extraction
of capital from Ambac Assurance Corporation, or due to further increases
in projected stress loss estimates on the insured portfolio.
Moody's will continue to evaluate Ambac's ratings in the context
of the future performance of the company's risk exposures relative
to expectations and resulting capital adequacy levels, as well as
changes to the company's strategic and capital management plans
as a Aa-rated company. Ambac has announced it intends to
pursue opportunities in the public finance market through its Connie Lee
Insurance Company subsidiary.
LIST OF RATING ACTIONS
The following ratings have been downgraded:
Ambac Assurance Corporation -- insurance financial strength to Aa3
Ambac Assurance UK Limited -- insurance financial strength to Aa3
Ambac Financial Group, Inc. -- senior unsecured debt
to A3 from Aa3, junior subordinated debt to Baa1 from A1 and provisional
rating on preferred stock to (P)Baa2 from (P)A2;
Anchorage Finance Sub-Trusts I-IV -- contingent capital
securities to A3 from Aa3; and
Dutch Harbor Finance Sub-Trusts I-IV -- contingent
capital securities to A3 from Aa3.
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 three months ended
March 31, 2008, the company reported a GAAP net loss of approximately
$1.7 billion. As of March 31, 2008, ABK
had shareholders' equity of approximately $1.3 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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