New York, April 13, 2009 -- Moody's Investors Service has downgraded to Ba3 from Baa1 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 senior debt of Ambac Financial Group,
Inc. (NYSE: ABK) to Caa1 from Ba1. Today's rating
action concludes a review for possible downgrade that was initiated on
March 3, 2009. The outlook for the ratings is developing.
Today's rating action has implications for the various transactions wrapped
by Ambac as discussed later in this press release.
The downgrade of Ambac's ratings primarily reflects weakened risk
adjusted capitalization, as Moody's loss estimates on RMBS
securities have increased significantly (particularly with respect to
Alt-A transactions). These higher loss estimates increase
the estimated capital required to support Ambac's sizable direct
RMBS portfolio (including securities owned as well as securities guaranteed)
and also the insurer's large portfolio of ABS CDO risks.
The rating agency noted that the claims-paying resources of Ambac
remain above Moody's expected loss estimates for the firm, though
this cushion has been significantly eroded, and losses in more severe
stress scenarios would exceed available resources.
Ambac recorded a statutory net loss of $4.0 billion for
2008, ending the year with $1.6 billion in policyholders'
surplus only after giving effect to $2.0 billion of new
capital raised during the year. Qualified statutory capital,
comprised of policyholders' surplus and contingency reserves,
stood at approximately $3.5 billion at year-end 2008,
but remains vulnerable to increases in case loss reserves over the near
to medium term, based on Moody's expected loss estimates.
Furthermore, Ambac's current impairment provisions for ABS
CDOs are highly sensitive to estimates of future cash flows on underlying
CDO collateral and projections of the timing of claims payments many years
into the future.
In Moody's view, Ambac's liquidity risks associated
with its investment agreement business have been largely contained due
to inter-company asset purchases and lending, with approximately
93% of investment agreement liabilities collateralized.
However, the credit profile of Ambac Assurance's investment
portfolio has deteriorated due to the purchase of structured finance assets
from the financial services business. At year-end 2008,
the market value of Ambac's consolidated invested assets was approximately
$2.5 billion below amortized cost, with much of the
difference attributable to RMBS assets. While Moody's believes
that large liquidity premiums contribute to this differential, we
also expect some further loss to principal based on Moody's ratings
on these securities.
Ambac is steadily de-leveraging through natural portfolio run-off,
high levels of refundings and via commutations of credit default swaps
on ABS CDOs. However, downward credit migration in the firm's
insured portfolio outside its mortgage-related exposures has largely
offset the positive capital accretion benefits associated with the de-leveraging
process to date.
In addition to reduced capitalization, Moody's also cited
deterioration in other key rating factors as dislocation in financial
markets -- and in Ambac's situation -- have persisted.
These include, most notably, Ambac's weakened business
position and very constrained financial flexibility. Taken together,
Moody's believes that these factors limit Ambac's ability
to effectively counter the company's weakened capital position.
Moody's stated that Ambac's developing outlook reflects the potential
for further deterioration in the insured portfolio as asset performance
develops over the intermediate (6-18 month) term. It also
incorporates positive developments that could occur over that time including
lower variability in mortgage-related asset performance,
the possibility of commutations or terminations of certain ABS CDO exposures,
and/or successful remediation efforts on poorly performing RMBS transactions.
The company's developing outlook is also based on the potential for various
initiatives being pursued at the US federal level to mitigate the rising
trend of mortgage loan defaults. Moody's will continue to evaluate
Ambac's ratings in the context of the future performance of its
insured portfolio relative to expectations and resulting capital adequacy
levels, as well as changes, if any, to the company's
strategic and capital management plans.
RATING RATIONALE FOR AMBAC FINANCIAL GROUP, INC.
The increase in the notching between the Ba3 insurance financial strength
rating of Ambac and the Caa1 senior unsecured debt rating of ABK,
to four notches, from three, reflects the deterioration in
Ambac's capital adequacy profile and the subordinated status of
holding company creditors to policyholder claims and $800 million
of preferred stock issued by the operating company. Moody's
notes that holding company liquidity remains strained due to the lack
of unrestricted dividend capacity during 2009. At year-end
2008, ABK had approximately $233 million of cash and inter-company
loans, which is equivalent to approximately 1.8 years of
debt service and holding company expenses.
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 downgrade of Ambac to below the investment grade level,
Moody's will position the ratings of all structured transactions wrapped
by Ambac at the higher of the underlying rating of the structured security
-- regardless of whether the underlying rating is published
or not -- and Ambac's Ba3 rating.
For all other transactions wrapped by Ambac, including municipal
securities, Moody's will withdraw the ratings for which there are
no published underlying ratings in accordance with current rating agency
policy. For these transactions, if the rating of Ambac 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.
LIST OF RATING ACTIONS
The following ratings have been downgraded; with a developing outlook:
Ambac Assurance Corporation -- insurance financial strength to Ba3
Ambac Assurance UK Limited -- insurance financial strength to Ba3
Ambac Financial Group, Inc. -- senior unsecured debt
to Caa1 from Ba1, junior subordinated debt to Caa2 from Ba2 and
provisional rating on preferred stock to (P)Ca from (P)Ba3.
The last rating action related to Ambac was on March 3, 2009,
when Moody's placed Ambac's ratings on review for possible
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 Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating Ambac can also be found in the Credit Policy & Methodologies
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, 2008, the company reported a GAAP net loss of approximately
$5.6 billion and a shareholders' deficit of $3.8
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Moody's downgrades Ambac to Ba3; outlook is developing
Financial Institutions Group
Moody's Investors Service