| NEW YORK
NEW YORK A rescue for bond insurer Ambac Financial Group Inc ABK.N may be announced on Monday or Tuesday, a person familiar with the matter said on Friday.
Ambac, facing billions of dollars of expected losses from guaranteeing repackaged subprime mortgages, is talking to banks and regulators about raising extra capital to keep its top credit ratings.
A deal has not yet been signed, and may still fall through, but talks with banks including Citigroup Inc (C.N), UBS AG UBSN.VX and Wachovia Corp WB.N are advancing, although there are still details to be worked out, the person said.
Investors fear that Ambac will lose its top credit ratings from Moody's and Standard & Poor's, forcing investors to sell billions of dollars of securities and lifting borrowing costs for consumers and city governments. U.S. stocks, which had been in negative territory for most of the session, turned positive after the prospect of an Ambac rescue was initially reported by CNBC television.
Ambac shares rose 16 percent to close at $10.71 on the New York Stock Exchange, but the second-largest U.S. bond insurer's shares have fallen 88 percent since the start of 2007.
The U.S. bond insurance industry, which guarantees some $2.4 trillion of debt, is broadly looking to raise new capital and reorganize as expected losses have mounted. The insurers originally focused mainly on insuring bonds issued by state and local governments, but have lost big after the foray into guaranteeing repackaged consumer debt and other complicated instruments.
At least two bond insurers, MBIA Inc and FGIC Corp, have announced plans to divide their municipal bond insurance businesses from their other insurance operations. Ambac may follow a similar path, people familiar with the situation said.
The New York Times reported in Saturday editions that Ambac plans to split itself in two and hopes to raise $3 billion to bolster its finances, citing a person who had seen the plans and spoke on Friday. An announcement could come as early as Monday, the newspaper added.
Rescuing or restructuring bond insurers is difficult because of the number of competing interests involved. Any splits could result in years of litigation, Bank of America analysts wrote last week.
For example, banks that bought guarantees from a bond insurer might not be interested in giving up their rights to cash flow from municipal bond guarantee business.
Ambac spokeswoman Vandana Sharma said the company was looking at all options, adding: "We have no comments on a deal or the timing of a deal. It's important when you negotiate that you let negotiations conclude before commenting."
Sharma added the company sees its efforts as raising capital to stabilize its ratings and does not see any deal as a "bailout".
Both Moody's and S&P have said they may cut the top ratings for Ambac's main bond insurance company. Fitch cut Ambac Assurance Corp's ratings on January 18.
Ambac guaranteed $524 billion of debt as of the end of December, less than MBIA's $679 billion.
In addition to Citi, UBS and Wachovia, banks working with Ambac include Barclays Plc (BARC.L), BNP Paribas SA (BNPP.PA), Allianz's (ALVG.DE) Dresdner Bank, Royal Bank of Scotland Group Plc (RBS.L), and Societe Generale (SOGN.PA).
Representatives from the bank were either not immediately available to comment or declined to comment on the potential timing of a deal.
Banks and the insurer are working with New York Insurance Superintendent Eric Dinallo. Andy Mais, a spokesman for the New York Insurance Department, said the department continues to work with bond insurers to resolve their problems and ensure a healthy, competitive market.
(Editing by Leslie Gevirtz, Andre Grenon and Gunna Dickson)