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Thursday, April 24, 2008 10:54 PM

Nothing Left To Lose At Ambac

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Bloomberg is reporting Ambac May Raise More Capital After Reporting Loss.

Ambac Financial Group Inc., the bond insurer that raised $1.5 billion last month, may be forced to seek more capital after it lost money for the third straight quarter.

Ambac's $1.66 billion loss for the three months ended March 31, announced yesterday, sent the shares tumbling 43 percent and sparked concerns that the company's AAA credit rating isn't as safe as investors thought.

Goldman Sachs Group Inc. analyst James Fotheringham estimates Ambac and larger rival MBIA Inc. may need to raise $3.4 billion each to fill capital shortfalls.

"Just when you thought things are getting back to normal, there are these horrible numbers," said Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York. "If trends like this continue, they are going to have to go back to the markets very soon."

The size of the first-quarter loss, which included charges totaling $3.1 billion, combined with the share slump may make it near impossible for Ambac to sell stock or bonds, Haines said in a report. "We question its ability to access the capital markets anytime soon, without which an outright downgrade from Moody's and S&P may be unavoidable," Haines said.

Callen said today Ambac has no plans to raise capital because it's generating enough money internally. Ambac expects to generate $1.2 billion to $1.5 billion in the next 12 months as policies mature without claims, said Vandana Sharma, a company spokeswoman.
Face Of Confidence?

CEO Michael Callen says Ambac Has No Liquidity Issues, Ratings Solid.

Ambac Financial Group Inc., the bond insurer struggling to hold on to its AAA credit rating, has no liquidity issues and the majority of its portfolio is performing well, interim Chief Executive Officer Michael Callen said.

The company's credit ratings "are solid," Callen said in a Bloomberg Television interview from New York today.

Ambac in March sold $1.5 billion in stock and equity units after more than $5 billion of charges on its guarantees of mortgage-liked debt.
Who do you believe?

Does Ambac have any credibility? I think not. Nonetheless, lets assume the top side of Ambac's estimate that they can generate $1.5 billion as policies mature. To be fair, let's also assume that Goldman Sachs analyst James Fotheringham is correct that Ambac needs to raise $3.4 billion each to fill capital shortfalls.

That is $1.9 Billion that Ambac needs to raise to which Robert Haines, an analyst at CreditSights Inc. says "We question its ability to access the capital markets anytime soon."

But once again, let's give Ambac the benefit of the doubt. Let's assume that Ambac can raise $1.9 billion.

At Thursday's close Ambac had a market cap of $1 billion and a closing price of $3.76. To raise $2 billion at these prices would cause a massive shareholder dilution making each share worth about 1/3 what it is worth today. That would make each share worth about $1.25. There are delisting rules at those prices.

By the way, Bloomberg is reporting "Ambac's new business slumped 87 percent last quarter after ratings companies threatened to strip the insurer of its AAA status".

Amazingly Moody's, Fitch, and the S&P did not downgrade Ambac after this fiacso. I guess the intent is to hold on to those ratings all the way to zero. The excuses at S&P were pathetic. Please consider: Ambac Net Loss Won't Lead to Downgrade, S&P Says.
Ambac Financial Group Inc. won't have its credit ratings cut by Standard & Poor's following a first-quarter loss that sent the company's shares down 43 percent.

"Ambac's reported losses were within our projected losses for Ambac as we reported in February," S&P Managing Director Dick Smith said in an e-mailed statement. "Therefore, we are not taking any rating action at this time."
Does this look like an AAA rated company?

Does that look like an AAA rated company to anyone on planet earth? OK, So the S&P predicted that reported losses were within projections. But can someone at the S&P please explain how the above numbers can possibly be rated AAA whether they met anemic projections or not?

In that regard, exactly how much new business is Ambac going to bring in now? Business is down 87%. With that, I wish to repeat what I said the other day in Ambac expects losses of 81.8% of underlying collateral: "Ambac is not going to get much if any guarantee business. And a guarantee business that does not get guarantee business is guaranteed to go bankrupt. It's as simple as that."

Ambac could have raised money at $40, $30, or $20 far easier than it can raise money at $3.76. Ambac is down a mere 96% in less than a year. What does it have to lose now by saying it will not raise capital? There is quite literally nothing left for Ambac to lose.

That begs the question: Is there is any credibility left to lose with Dick Smith, Managing Director, at the S&P either?

Mike "Mish" Shedlock
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