Hard-hit bond insurer Ambac Financial Group's plans to raise at least $1.5 billion in new capital are not enough to fix its capital adequacy problem, analysts at Goldman Sachs and J.P. Morgan Securities said.
"Our analysis of expected losses suggests that Ambac needs to raise $2.5 billion instead of the $1.5 billion announced,'' Goldman analyst James Fotheringham said.
On Wednesday, the second-largest U.S. bond insurer had said it has begun a public offering of at least $1 billion of common stock and $500 million of equity units.
New capital would give Ambac more funds to cover billions of dollars of claims it could face after insuring subprime mortgage bonds and other risky debt.
Following Ambac's announcement on Wednesday, rating agencies Standard & Poor's and Moody's Investors Service said the company may hang on to the ``AAA'' ratings of its bond insurance arm if the plans to raise capital were successful.
"Although S&P and Moody's have signed off that the completion of this deal will get Ambac off negative watch at both agencies, we believe it is likely that another round of capital may be required this year to avoid a downgrade,'' JP Morgan analyst Andrew Wessel wrote in a note to clients.
Wessel forecast a first-quarter loss of $2.03 a share for Ambac, compared with his prior view of a profit of 47 cents a share. For 2008, he expects Ambac to post a loss of $2.13,
versus his previous estimate of a profit of $3.16 a share.
Goldman's Fotheringham cut his price target on Ambac's stock by $1 to $8, and recommended investors avoid this space as further capital announcements and dilution to shareholder
value were likely.
Fotheringham cut his price target on MBIA , the world's largest bond insurer, to $12 from $14.
Shares of Ambac fell more than 8 percent to $7.97 in trading before the bell, after closing at $8.70 Wednesday on the New York Stock Exchange.