November 19, 2008 / 10:57 PM / in 9 years

Ambac terminates $3.5 bln of risky mortgage exposure

NEW YORK, Nov 19 (Reuters) - Ambac Financial Group ABK.N said on Wednesday it has reached an agreement with counterparties to tear up $3.5 billion of its exposures to risky mortgage backed debt, which will improve its capital position.

The bond insurer, whose business has virtually dried up since its insurance arm Ambac Assurance Corp lost its top “AAA” ratings in June, said it paid $1 billion to terminate the exposures it had from selling protection on the assets through Collateralized Debt Obligations (CDOs).

“It’s a positive deal for Ambac,” said David Havens, desk analyst at UBS in Stamford, Connecticut. “At the end of the day Ambac would probably have had to pay more than $3.5 billion to its counterparties, though that would have happened over a longer period of time.”

The company said it expects to be able to make positive adjustments to its mark-to-market and impairment reserves as a result of the settlements.

“Ambac has consistently emphasized that in this period of extreme uncertainty in the capital markets, the de-risking and de-leveraging of our balance sheet is our highest priority,” Chief Executive David Wallis said in the release. “These settlements represent positive and tangible steps towards that goal.”

Standard & Poor’s cut its ratings on Ambac and its insurance arm Assurance earlier on Wednesday, saying the company remains exposed to heavy losses on U.S. mortgage-related securities.

The agency cut its financial strength rating on Ambac Assurance three notches to “A,” or the sixth-highest investment grade.

Earlier this month Moody’s Investors Service cut Ambac Assurance four notches to “Baa1,” the third-lowest investment grade, from “Aa3.”

Reporting by Karen Brettell;

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