Ambac raising at least $1.5 bln of new capital

By Dan Wilchins

NEW YORK (Reuters) - Bond insurer Ambac Financial Group Inc (ABK.N: Quote, Profile, Research, Stock Buzz) said on Wednesday it plans to sell at least $1.5 billion of stock and convertible securities, to help preserve the top-tier credit ratings critical for its main insurance business.

New capital would give the second-largest U.S. bond insurer more funds to cover billions of dollars of claims it could face after insuring subprime mortgage bonds and other risky debt.

Shares of Ambac nevertheless fell $2.02, or 19 percent, to $8.70, reflecting investor disappointment that banks were not committing their own funds to help rescue Ambac after talking to the company, New York's insurance superintendent and others for weeks.

"It looks like (banks) had a close look at what was going on at Ambac, and they backed away. Things may be bad there," said Peter Kovalski, portfolio manager at Alpine Woods Capital Investors, which owns Ambac shares.

Ambac had looked at obtaining funding from banks, and was willing to go with one of those options until rating agencies rejected it, a person familiar with the matter said. Following that rejection, selling securities was the simplest way to raise capital, the person said.

Ambac has launched offerings of at least $1 billion of common stock and at least $500 million of mandatory convertibles known as "equity units."

So far, it has found about $1 billion of demand for the stock, and may increase the offering if more investors are interested, a person briefed on the matter.

Ambac is making other moves to strengthen capital, including slashing its dividend and suspending selling new insurance on repackaged debt known as "structured finance."