Moody's cuts Ambac, warns on counterparty losses on CDOs
NEW YORK, July 30
NEW YORK, July 30 (Reuters) - Ambac Financial Group's ABK.N insurance arm is at high risk of regulatory intervention, which in turn is increasing the likelihood that counterparties to the insurer will need to tear up contracts they hold with the firm at a large loss, Moody's Investors Service said.
Moody's late on Wednesday cut its ratings on Ambac Assurance Corp by five notches to Caa2, eight steps below investment grade and a deeply speculative rating.
The move came after Ambac said on Monday it expects to report around $1.6 billion in mortgage-related losses in the second quarter. For details, see [ID:nN27547188]
"These losses would reduce Ambac's regulatory capital to levels below the required minimum threshold," Moody's said in a statement.
Ambac has been decimated by insurance it sold on risky mortgages via collateralized debt obligations (CDOs) backed by credit default swaps.
"With the risk of regulatory intervention now elevated, Moody's believes there will be increased pressure on Ambac's counterparties to commute outstanding exposures on terms that could imply a distressed exchange," Moody's said.
Ambac said on Monday that its expected loss for the second quarter excluded the impact of some agreements the company made with counterparties to tear up two CDO exposures this month.
The company will pay around $750 million to tear up $2.8 billion in notional exposures via these CDOs, it said.
Moody's also cut Ambac Financial's ratings by three notches to Ca, ten steps below investment grade, saying the unit would be less likely to access resources at Ambac Assurance going forward.
This raises the risk that the parent company will launch an exchange on its outstanding debt at less than its par value, Moody's said.
Ambac said that its insurance arm has petitioned the insurance regulator in Wisconsin to release "a substantial portion" of its contingency reserves, though there is no assurance this request will be approved.
Standard & Poor's on Tuesday slashed Ambac Assurance's counterparty credit rating eleven notches to CC -- 10 steps below investment grade, reflecting a high risk of regulatory intervention. [ID:nN28285452]
(Reporting by Karen Brettell;)
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