Ambac loses top rating in blow to its business

By Walden Siew and Dan Wilchins

NEW YORK (Reuters) - A unit of Ambac Financial Group Inc (ABK.N) lost a crucial top "AAA" credit rating on Friday, raising questions about the bond insurer's ability to win new business and potentially forcing investors to sell billions of dollars of insured bonds.

Fitch Ratings cut Ambac Assurance Corp's top rating after the bond insurer scrapped plans to issue $1 billion of new equity. Ambac, the world's second biggest bond insurer, needs new capital after writing down repackaged consumer debt hit by the subprime mortgage crisis.

Fitch cut Ambac and its units multiple notches, and analysts said other rating agencies may follow. Standard & Poor's said earlier on Friday that it may cut Ambac's ratings. Moody's Investors Service said the same on Wednesday.

Difficulties at Ambac and other bond insurers could have a huge impact on credit markets. As downgrades roll in, investors that can only own top-rated instruments will have to sell their securities, pushing bond values lower.

Those price declines would deal another blow to investors already reeling from the subprime mortgage crisis. Ambac insures $556 billion of bonds, including securities issued by state and local governments and repackaged consumer debt.

Issuers will also likely be reluctant to pay for Ambac bond insurance, which is normally used to turn lower-rated securities into top-rated bonds.

"It will be hard to maintain the viability of the business," said Ben Watkins, director of Florida's division of bond finance, which has used Ambac insurance in the past.

Fitch cut Ambac Assurance's rating to "AA," the third-highest rating, from "AAA." It also downgraded parent company Ambac Financial's long-term rating three notches to "A," the sixth-highest rating, from "AA." More rating cuts are possible, the agency said.

As a result of the downgrade Fitch also took action on 137,000 bonds insured by Ambac, the vast majority of which are municipal bonds. Debt with underlying ratings above Ambac's "AA" rating will retain their higher ratings, while issues rated "AA" or below will now take the same rating as Ambac.

A total of 420 classes of asset-backed securities guaranteed by Ambac were also cut to "AA."

Fitch is the first major rating firm to downgrade Ambac, which is in turn the first major triple-A rated bond insurer to be downgraded by any agency.

But other insurers may also face ratings cuts. Moody's said on Thursday it may cut MBIA Inc (MBI.N) unit MBIA Insurance Corp, the world's largest bond insurer.

ISSUANCE PLANS SCRAPPED

Ambac said earlier on Friday that it canceled its plans to issue new equity because market conditions were too weak.

Investors saw the scrapping of the deal as a positive, as new shares would have diluted the value of existing ones.