Moody's cuts Ambac Financial debt rating to junk

NEW YORK - Moody's Investors Service on Wednesday downgraded bond insurer Ambac Financial Corp.'s debt ratings to junk status, citing its losses from U.S. mortgage risks.

Moody's cut Ambac Financial's senior unsecured debt rating by four notches to Ba1, which is considered non-investment grade, or "junk" status, from A3.

Earlier Wednesday, the New York-based insurer posted a third-quarter loss of $2.43 billion, as it increased loss reserves for mortgage-backed securities and took write-downs on credit derivatives.

Moody's also cut the insurance financial strength rating of Ambac Assurance Corp. and Ambac Assurance UK Ltd. to Baa1, which remains investment grade, from Aa3.

The outlook for the ratings is developing.

The ratings agency said the downgrade resulted from expectations for continued losses, the company's diminished business prospects and its "impaired financial flexibility."

The insurance subsidiary's financial strength rating remains investment grade because Moody's thinks the company has enough cash to provide a cushion above expected loss levels.

"Should Ambac's regulatory capital position continue to deteriorate, there would be further negative pressure on the firm's ratings," Moody's said.

The developing outlook reflects both the potential for further deterioration in the insured portfolio as well as positive developments that could occur over the near to medium term, including remediation efforts on some of the toxic paper in question or other efforts by the federal government to reduce rising mortgage loan defaults, Moody's said.

As a result of the downgrades, the Moody's-rated securities that are guaranteed or "wrapped" by Ambac are also downgraded to Baa1, except those with higher public underlying ratings.

Ambac Financial shares, which closed down 40.9 percent at $2.01 after the earnings report, fell an additional 36 cents, or 18 percent, to $1.63 in aftermarket electronic trading.

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