Ross to put up to $1 bln into rival to Ambac, MBIA

NEW YORK (Reuters) - Billionaire Wilbur Ross has agreed to invest up to $1 billion in Assured Guaranty Ltd (AGO.N), bypassing big bond insurers such as Ambac Financial Group Inc (ABK.N) in favor of a rival that has largely avoided the credit problems plaguing the industry.

Ross agreed to buy $250 million of common shares of Assured Guaranty and committed to purchase up to $750 million in additional stock at the company's option. Shares of Assured Guaranty, the fifth-largest bond insurer, rose 12.6 percent to close at $25.65 on the New York Stock Exchange.

Assured Guaranty has stayed away from insuring repackaged subprime mortgages and other risky debt since late 2003, while competitors, including Ambac Financial Group Inc (ABK.N) guaranteed the securities and are expected to face billions of dollars of payouts in coming years.

Those expected payouts could cost Ambac its top debt ratings. Banks, regulators and others are working to raise new capital for Ambac, but those discussions are moving more slowly than hoped, people familiar with the matter said.

Fears of weakness at the biggest bond insurers have cut into their new business. Ross told Reuters that Assured Guaranty can use his capital to win new business from competitors.

"The idea of this capital is to reposition the company, not to simply patch a hole," Ross said in a telephone interview, adding that he was still in conversations with other bond insurers.

That strategy is slightly different from Ross' usual preference to snap up companies that are failing or close to it. Ross made his billions by buying distressed companies in the steel, coal and textile industries and nursing them back to health.

Ross said he may use Assured Guaranty as a platform for buying rival businesses, or reinsuring other insurers' business.

Hamilton, Bermuda-based Assured Guaranty already has reinsured competitors' business. The company agreed in December to reinsure $29 billion of Ambac's insurance and issued about $300 million of shares to help fund the deal.

Warren Buffett has also used bond insurers' weakness as a chance to win new business -- the billionaire recently started his own financial guarantee company. Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) reported earnings on Friday afternoon.

Assured Guaranty had insured about $200 billion of outstanding debt as of the end of 2007, making it less than a third of the size of MBIA Inc (MBI.N), the largest bond insurer.

Merrill Lynch acted as adviser to Assured Guaranty on the deal with Ross.

JOY AND PAIN FOR AMBAC

Investors had hoped that Ross's WL Ross & Co LLC would help rescue Ambac, after reports last month he was eyeing an investment in the second-largest bond insurer.

Talks with banks are moving slowly, but even without new funds, Ambac's main unit has the minimum amount of capital required to maintain its top credit ratings, Moody's Investors Service said on Friday.

Adding another $2 billion of new capital would bring Ambac to Moody's "target" level and give Ambac more than 3 times the capital required to cover expected losses whose present value is around $4.2 billion, the rating agency said.

Moody's said it may still cut Ambac's ratings.

"We would expect that some of the issues we are focusing on will become more clear shortly and we would expect to conclude our analysis soon thereafter," Moody's analyst Jack Dorer said in an interview with Reuters.

Standard & Poor's is also weighing a cut and Fitch stripped Ambac Assurance of its top ratings last month.

The combination of positive and negative news meant that Ambac's shares oscillated wildly, trading as much as 8.3 percent lower and 2.5 percent higher. Ambac shares closed down 5.6 percent at $11.14 on the New York Stock Exchange.

(Additional reporting by Christian Plumb, Dan Burns, Karen Brettell, and Jonathan Keehner; Editing by Gerald E. McCormick/Andre Grenon)