Moody's said late Wednesday it may cut Ambac ratings and will look at how industry problems affect other bond insurers as well. The insurer said Thursday it is looking at whether the potential downgrade will affect its capital-raising plans.
Top debt ratings are crucial for Ambac's business, which involves essentially turning lower-rated bonds into top-rated bonds by insuring them. If Ambac has trouble raising capital, it may have trouble staying in business, analysts said.
"If I were a shareholder, I would worry about survivability," said Anton Schutz, president of Mendon Capital in Rochester, New York, which does not own shares of Ambac.
The cost of protecting Ambac obligations against bankruptcy surged in the credit derivatives markets.
Ambac's woes spooked investors in other financial services stocks. Some have raised fears that brokerages such as Merrill Lynch that have relied on bond insurers to hedge certain investments could face steeper losses if they go under.
Ambac shares fell $7.07 to $5.95, after falling as low as $4.52, the lowest since Ambac listed on the New York Stock Exchange in 1991. Shares of rival MBIA dropped 32 percent, trading at $9.09 on the NYSE Thursday afternoon.
Exposure to CDOs
Bond insurers generated much of their profit growth in the last decade by insuring repackaged debt known as asset-backed securities and collateralized debt obligations. But expected losses on many of those securities have surged in recent months as the subprime mortgage crisis has widened.
Ambac said Wednesday it would record a $3.5 billion after-tax write-down, of which about $1.1 billion is related to a series of asset-backed securities repackaged into CDOs.
That $3.5 billion wipes out nearly two-thirds of Ambac's shareholder equity, or assets minus liabilities. Ambac's market capitalization is down to about $630 million, making it the smallest company in the Standard & Poor's 500 index.
For a company of that size, raising $1 billion in the public convertible bond markets would be hard, and an equity issuance would be a tough sell, portfolio managers said.
That means raising private capital is likely Ambac's best bet. Ambac would be standing in a long line of U.S. financial companies seeking private capital.
Citigroup said Tuesday it had raised $12.5 billion from sovereign wealth funds and others, while Merrill has received $12.8 billion in infusions from U.S. and foreign investors.
Investors wishing to protect Ambac parent company obligations against default for five years must pay 29 percent of the value of the debt upfront and 5 percentage points a year.