Ambac falls on downgrade, capital concern

CHARLOTTE, N.C. - Shares of Ambac Financial Group Inc. lost more than a fifth of their market value Thursday, amid concern about the bond insurer's capital position. The company on Wednesday reported a wider third-quarter loss and its debt rating was downgraded to junk by Moody's Investors Services.

Ambac shares dropped 48 cents, or 24 percent, to $1.52. A year ago, shares traded at a 52-week high of $34.42.

Analysts lowered estimates and price targets on the company, with some projecting the New York-based firm will need billions in additional capital.

"Ambac's current capital position is solid but its longer-term viability is in serious jeopardy," CreditSights analyst Rob Haines wrote in a research note to clients.

Haines said Ambac will need to post an additional $3.2 billion in collateral, which in turn, could leave the company with at least a $2.1 billion cash shortfall in its financial services unit.

Ambac said Wednesday that it lost $2.43 billion in the third quarter, hurt by increased loss reserves for toxic mortgage-backed securities and write-downs on credit derivatives. Moody's then 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. four notches 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 Moody's has come to a ratings conclusion without the benefit of completing its own analysis of our portfolio."

Many bond insurers continue to expect mounting losses tied to exposure to 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.

Friedman, Billings, Ramsey & Co. analyst Steve Stelmach said strategic options for Ambac are shrinking.

"The company's capital flexibility is even more limited than previously expected after reporting third-quarter results," he wrote in a research note to clients. "Liquidity could be an added concern."

Stelmach cut his price target on Ambac shares to $2 from $5, citing increasing strain on the franchise. He rates the insurer "Market Perform."

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.

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