Rating Cut on Ambac - Analyst Blog

Last week, rating agency Moody’s cut Ambac Financial Group’s (ABK) debt rating to “C" from “Ca." This move was fueled by Ambac’s announcement that it might seek bankruptcy protection if it is unsuccessful in restructuring its debt. The company’s main unit Ambac Assurance Corporation (AAC) has been hit by regulators, who have taken up the rehabilitation of a portion of its liabilities. The rating “C" reflects high probability of default and very low debt recovery.

The Office of the Commissioner of Insurance (OCI) has ordered AAC to create a segregated fund which would contain $35 billion of company’s liabilities on policies related to residential mortgage-backed securities and $29 billion on other credit derivatives and structured finance products. No claims will be made with respect to any policies under the segregated account until the rehabilitation plan is approved from the court, which might take six months. A moratorium on claims payment has been put to conserve Ambac’s reserves.

The rating agency has however placed the “Caa2" rating on Ambac’s chief operating unit AAC with a watch for possible upgrade. The rating agency is of the opinion that separation of AAC’s risky exposures will protect the company’s senior unsecured policyholders in the general account. However, the unit’s inability to underwrite profitable new business might restrict Moody’s from upgrading the ratings.

The regulatory intervention is meant to protect investors of municipal bond issues. Ambac Assurance had been under constant vigilance from the regulators with respect to capital and surplus targets. Ambac Assurance has been hit by losses on investments as well as the insurance of structured financial products, reducing its claims paying capability. Recently, Ambac Assurance’s estimation of future loss impairments has increased significantly.

Ambac has been in trouble for quite some time. The company has suffered multiple rating downgrades since Jun 2008. The financial strength rating downgrades have adversely impacted Ambac’s ability to generate new business and have negatively affected its operating and financial results. Ambac CFO Sean Leonard resigned last November after the company was found guilty of misstating financial statements to hide the capital shortfall in order to avoid seizure by the regulators.

Earlier, the rating agency Standard & Poor's made a similar move by slashing the rating of AAC to “R" from “CC". The rating of “R" is considered to be junk and below investment status, and indicates the regulatory supervision on the company.
Read the full analyst report on "ABK"
Zacks Investment Research