NEW YORK (Reuters) - A unit of Ambac Financial Group Inc ABK.N 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.
As a result of the downgrade Fitch also took action on 137,000 bonds insured by Ambac, the vast majority of which are municipal bonds. Debt with underlying ratings above Ambac’s “AA” rating will retain their higher ratings, while issues rated “AA” or below will now take the same rating as Ambac.
A total of 420 classes of asset-backed securities guaranteed by Ambac were also cut to “AA.”
Fitch is the first major rating firm to downgrade Ambac, which is in turn the first major triple-A rated bond insurer to be downgraded by any agency.
But other insurers may also face ratings cuts. Moody's said on Thursday it may cut MBIA Inc MBI.N unit MBIA Insurance Corp, the world's largest bond insurer.
ISSUANCE PLANS SCRAPPED
Ambac said earlier on Friday that it canceled its plans to issue new equity because market conditions were too weak.
Investors saw the scrapping of the deal as a positive, as new shares would have diluted the value of existing ones.
“It was the right move. The idea of this issuance should never have been approached,” said Mike Grasher, analyst at Piper Jaffray in Chicago.
The company’s shares traded higher early in the session, but fell after the downgrade on Friday afternoon, after the bond market had closed ahead of a holiday weekend. Ambac’s shares closed down 4 cents at $6.20, and are down over 90 percent since early January 2007.
Ambac said on Wednesday it planned to issue $1 billion of equity or convertible securities after estimating its after-tax credit derivative write-downs in the fourth quarter at $3.5 billion, equal to nearly two-thirds the value of its shareholders’ equity, or assets minus liabilities.
On Friday, Ambac said it continues to evaluate alternatives and remains confident of its insured portfolio. The company may still find other ways to raise capital, such as selling itself or buying reinsurance.
But analysts said these options were unlikely to work out. Buying Ambac would entail taking on big potential liabilities that would be hard to estimate. Ambac, based in New York, insures $556 billion of bonds.
Additional reporting by Neil Shah, Anastasija Johnson and Karen Brettell; Editing by Leslie Adler
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