January 18, 2008 / 4:33 PM / 12 years ago

UPDATE 2-RESEARCH ALERT-BofA, Citigroup cut Ambac, MBIA

(Adds details, Citigroup’s comments, share movement, background)

By Nivedita Gupta

BANGALORE, Jan 18 (Reuters) - Two brokerages downgraded hard-hit bond insurers Ambac Financial ABK.N and MBIA Inc (MBI.N), with Banc of America Securities saying the companies are better off not raising capital amidst the continuing turmoil in financial markets.

After news of the downgrade, Ambac said on Friday it does not plan to boost capital levels — as previously planned — by issuing equity, in a move that may result in its top debt ratings getting cut, sending shares up as much as 15 percent.

BofA analyst Tamara Kravec cut the financial guarantors sector to “neutral” from “overweight” and downgraded Ambac and MBIA to “neutral” from “buy.”

Citigroup analyst Heather Hunt cut Ambac and MBIA to “hold” from “buy,” saying it was difficult to maintain her top rating amid worsening credit market conditions, despite extraordinarily low valuations. “Valuations suggest financial distress but financials do not,” she said.

On Wednesday, Ambac said it cut its dividend and planned to raise $1 billion of new capital after estimating a huge write-down for the fourth quarter that would erase nearly two-thirds of the company’s net worth.

Earlier in January, rival MBIA slashed its dividend by 62 percent and said it would sell $1 billion of debt to preserve capital and the “triple-A” ratings it needs to operate normally in a mortgage market under siege.

BofA’s Kravec believes a “triple-A” rating is worthless in the current environment and that capital raising to preserve the rating is extremely dilutive.

Both Kravec and Hunt cut their price targets on Ambac and MBIA to $7 and $10, respectively.

Shares of Ambac had plummeted 76 percent while MBIA’s stock lost more than half its value in 2008 before the start of trading Friday, as the companies scramble to maintain their top credit rating amid doubts about their ability to stay in business.


On Thursday, rating agency Moody’s Investors Service said it may cut MBIA’s and Ambac’s top “triple-A” debt ratings, which is crucial to the companies’ efforts to guarantee bonds.

“The financial guarantor stocks such as Ambac and MBIA have come under significant pressure recently due to concerns about rating agency downgrades and speculation about potential bankruptcy,” Citigroup analyst Keith Horowitz said in a summary note on Friday.

However, Citigroup’s Hunt said in a note dated Jan 17, “Moody’s review for a downgrade on MBIA and Ambac may mean a move to AA from AAA, making run-off likely.

“This is not bankruptcy; record losses would be paid over time and can be absorbed by current capital and income on existing business that is contractually obligated to them.”

MBIA said on Friday it was surprised by Moody’s Investors Service’s decision to potentially downgrade its credit ratings, and that it believes its capital plan meets agencies’ previously outlined requirements.

Shares of MBIA fell to $6.87, their lowest level since 1991, before pulling back some of the losses to trade down almost 24 percent at $7.04 in morning trade on the New York Stock Exchange.

Shares of Ambac rose to a high of $7.18, before falling back to trade up more than 3 percent at $6.44 in morning trade. (Editing by Pratish Narayanan)

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