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: Quote, Profile, Research) 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.