Ambac Sees Ratings Cut, Commutes CDO Deals

Tired of hearing about CDOs yet? So are we. But the monoline bond crisis is still there, still generating downgrades — and on Tuesday, Standard & Poor’s Ratings Services cut Ambac Financial Group Inc.’s (ABK) core credit rating further, citing concerns over continuing exposure to bad mortgages. The agency also cut the financial strength rating of the company’s bond insurance subsidiary, Ambac Assurance, to “A.” Shares in the company tanked on the news, but recovered sharply after Ambac — ostensibly moving to limit the damage from the ratings downgrade — said it had commuted $3.5 billion in CDO exposure. In a statement, the insurer said it paid about $1 billion in cash to close positions in four collateralized debt obligation transactions. Nearly all of the involved collateral had been downgraded to junk levels, the company said, according to the Wall Street Journal. The announced settlement limits some of the firm’s exposure going forward, and is a clear response to criticism from rating agencies suggesting the monoline remains too exposed to troubled mortgage markets that have already cost it a prior AAA rating. “The rating action on Ambac reflects our view that the company’s exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company to the potential for further adverse loss development,” said Standard & Poor’s credit analyst Dick Smith in a press statement. “These losses have slightly more than offset the benefits to the company of lower capital requirements that result from a declining book of business.” Ambac posted a wide $2.4 billion loss during the third quarter, as it absorbed at least $3 billion in write-downs and costs to pay anticipated claims amid further deterioration in the U.S housing market. the monoline took a $2.7 billion write-down on securities it had guaranteed, leading the insurer to also take a $2.5 billion impairment charge on high-grade CDO of ABS securities — CDOs backed primarily by other mortgage securities. Insurers like MBIA and Ambac provided the top-rated portions of private-party RMBS and related CDO deals with a guarantee that essentially was designed to serve as a proxy for the government guarantee that exists on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it — which means that increasing MBS losses have tanked insurers’ ratings, and escalated the expected amount of claim losses tied to deals they insured. Ambac is trying to revive its municipal bond insurance business by flipping the switch on its once-dormant Connie Lee Insurance Co. unit. The company was downgraded Nov. 6 by Moody’s Investors Service, which also cited concern over mortgage exposure (see story). Shares in Ambac shot up sharply in after-market trading, moving to $1 per share ahead of Wednesday’s open. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.