Banks look to bolster Ambac with $2bn

[squaretimes]

By Aline van Duyn and Ben White in New York
Published: February 22 2008 20:55

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from the banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

Ambac is also considering raising fresh equity from shareholders. It is not clear how much capital it will need, or what credit ratings the split businesses would have.

The group of banks looking at supporting Ambac includes Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner.

These are the ones with the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply and result in billions of dollars of write-downs if the insurer’s credit ratings fall far below the triple-A level.

Bond insurers, or monolines, have for decades guaranteed debt issued by municipal borrowers, lending them, in effect, triple-A credit ratings in exchange for a fee. In recent years, they have ventured into structured finance guarantees, including guarantees on complex debt instruments such as collateralised debt obligations. The subprime mortgage crisis has led to an unexpected jump in losses in this sector, putting the triple-A credit ratings of Ambac and MBIA, the biggest monolines, at risk.

Municipal borrowers are being hit by the crisis of confidence in the insurers, whose AAA guarantees back $2,400bn worth of bonds. With interest rates for some municipal borrowers rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.

The different risk profiles of the municipal business – which has few defaults – and the structured finance guarantee business means they may not be combined in the future.

Source Financial Times