By Liam Pleven and Carrick Mollenkamp
The Wall Street Journal
February 1, 2008
A consortium of banks is working on a possible bailout of No. 2 bond insurer
Ambac Financial Group Inc. in a move that would provide the company with a pool of money to avoid a potential downgrade, according to people familiar with the situation.
A downgrade of a bond insurer such as Ambac could cause billions in losses for major banks. Additionally, debt issuers currently backed by Ambac would see their cost of funding rise if the insurer was downgraded. The consortium's money would be used to help Ambac avoid a downgrade.
Ambac recently lost the top rating from Fitch Ratings and has been placed on watch for a possible downgrade by Moody's Investors Service. The company recently said it was in talks with "very credible" potential partners to supply needed capital. Ambac did not return a call seeking comment. The other leading bond insurer,
MBIA Inc., is not involved in this plan because it is seen to be stronger financially since it has already raised capital.
Greenhill & Co., a boutique investment bank, is working with the banks. A spokesman for the company declined to comment. No formal contract has been signed and the plan could still change or include a different mix of banks.
New York State Insurance Superintendent Eric Dinallo said in a statement that his office is continuing to work on a deal to strengthen the capital positions of the bond insurers, but did not give a timetable for a possible agreement.
The consortium is likely to include
Citigroup Inc.,
Dresdner Bank,
BNP Paribas SA,
Royal Bank of Scotland Group PLC,
Wachovia Corp.,
Barclays PLC and
UBS AG. This week, UBS added $4 billion to its total write-downs and some of that was to cover exposure to securities insured by the bond insurers. UBS and Citigroup were among the biggest underwriters of collateralized debt obligations.
In many instances, banks have a stake in the bond insurers' future. If insurers are downgraded, the banks could have to write down assets that could total $100 billion, according to an Oppenheimer & Co. report this week.
There is a growing sense by investors and analysts that the initial round of write-downs in the fall and latter part of 2007 were net exposure write-downs that included the protection the financial firms had bought from the bond insurers. These banks then were reporting net exposures and factoring in the insurance coverage.
But more recent reports have factored in the weakening financial health of the bond insurers and that's leading to a new wave of write-downs. News of the plan was first reported by CNBC.
Ambac shares were up about 15% at $12.97 around noontime in New York, while shares in MBIA were up 5% at $16.25.
Karen Richardson contributed to this article
Source: WSJ
Banks Working on Ambac Bailout
