Moody's cuts Ambac Financial to junk on loss

NEW YORK, Nov 5 (Reuters) - Moody's Investors Service on Wednesday cut its ratings on Ambac Financial Corp (ABK.N) into junk territory, and also cut its insurance arm, citing the bond insurers' losses from risky residential mortgages.

Ambac and competitor MBIA Inc (MBI.N) both reported large third-quarter losses on Wednesday, hurt by further writedowns and limited new business, and sending both companies' shares into a tailspin. For details, see [ID:nN05542808]

Ambac's third-quarter loss and the possibility of even greater expected losses in extreme stress scenarios were both reasons for the downgrades, Moody's said.

The diminished ability of Ambac to write new business and its impaired financial flexibility were also reasons, the rating agency added.

Moody's cut Ambac Financial's unsecured debt four notches to "Ba1," one step below investment grade, from "A3," and cut its insurance arm, Ambac Assurance Corp, four notches to "Baa1," the third lowest investment grade, from "Aa3."

The outlook for both ratings is "developing," meaning they may be lowered further, raised or left unchanged.

"Should Ambac's regulatory capital position continue to deteriorate, there would be further negative pressure on the firm's ratings," Moody's said.

Positive developments, meanwhile, could include Ambac forming agreements with its counterparties to tear up mortgage exposures, or government initiatives to mitigate mortgage defaults.

(Reporting by Karen Brettell;Editing by Diane Craft)