Ahead of the Bell: Ambac Financial falls

CHARLOTTE, N.C. - Shares of Ambac Financial Group Inc. tumbled in premarket trading Thursday, as concern loomed about the bond insurer's capital position after it reported a third-quarter loss and its debt rating was downgraded to junk.

Analysts lowered estimates and price targets on the company, a day after Ambac said its third-quarter loss widened sharply and Moody's Investors Service downgraded the firm's debt ratings to junk status.

Shares fell nearly 11 percent to $1.79 in premarket trading, after closing at $2.01 Wednesday.

"Strategic options for Ambac are shrinking as the company's capital flexibility is even more limited than previously expected after reporting third quarter results," wrote Friedman, Billings, Ramsey & Co. analyst Steve Stelmach in a research note to clients. "Liquidity could be an added concern if the company's primary regulatory does not allow for intercompany support following last night's downgrade by Moody's."

Stelmach cut his price target on Ambac shares to $2 from $5, citing increasing strain on the franchise. He rates the insurer "Market Perform," but said he remains "cautious" on the company's shares "following what was a drastically lower-than-expected earnings result.

Deutsche Bank analyst Darin Arita lowered his yearly outlook, and said he now expects Ambac to report an operating loss of $14.93 per share for the year, reflecting the higher than expected quarterly loss at the firm. He previously forecast a loss of $7.10 per share.

Arita slashed his price target to $1 from $3, but maintained a "Hold" rating on the stock.

Ambac said Wednesday that it lost $2.43 billion, or $8.45 per share, during the third quarter, compared with a loss of $360.6 million, or $3.53 per share, in the year ago period.

The strain came as the New York-based firm increased loss reserves for mortgage-backed securities and took write-downs on credit derivatives.

Analysts surveyed by Thomson Reuters, on average, forecast a loss of 50 cents per share for the quarter.

Moody's late Wednesday downgraded Ambac's debt ratings to junk status due to expectations for continued losses, the company's diminished business prospects and its "impaired financial flexibility."

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

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.

"It appears that this rating action has been precipitated by our earnings announcement," David W. Wallis, president and chief executive of Ambac, said in a statement Thursday. "It is disappointing that Moodys has come to a ratings conclusion without the benefit of completing its own analysis of our portfolio."

Many bond insurers continue to deal with the expectation of mounting losses on exposure to insuring troubled mortgage-backed securities. As mortgages have increasingly defaulted since the middle of 2007, expectations for defaults on bonds backed by pools of the troubled loans has grown.

Because of those expected losses, bond insurers like Ambac continue to set aside increasing amounts of cash to cover potential future losses.

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

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