NEW YORK (Reuters) - Bond insurer Ambac Financial Group Inc said on Wednesday it plans to sell at least $1.5 billion of stock and convertible securities, to help preserve the top-tier credit ratings critical for its main insurance business.
New capital would give the second-largest U.S. bond insurer more funds to cover the billions of dollars of claims it could face after insuring subprime mortgage bonds and other risky debt.
But investors were disappointed in the news, because to some it signaled that banks were not committing their own funds to help rescue Ambac, after weeks of negotiations.
“It looks like (banks) had a close look at what was going on at Ambac, and they backed away. Things may be bad there,” said Peter Kovalski, portfolio manager at Alpine Woods Capital Investors, which owns Ambac shares.
But even amid these concerns, investors have so far agreed to buy about $1 billion of Ambac shares, and the offering may be increased, according to a person briefed on the matter.
Ambac’s shares slid 18.8 percent to close at $8.70 on the New York Stock Exchange. The company’s shares have fallen 90 percent since the start of 2007.
Ambac said it was launching offerings of at least $1 billion of common stock and at least $500 million of mandatory convertibles known as “equity units.”
Ambac is making other moves to strengthen capital, including slashing its dividend and suspending selling new insurance on repackaged debt known as “structured finance.”
“We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement,” Chief Executive Michael Callen said in a statement.
Boosting capital levels is meant to help Ambac’s main unit, Ambac Assurance, retain its top credit ratings.
Fitch Ratings has already stripped the Ambac Assurance Corp unit of its “AAA” ratings, and said on Wednesday that raising another $1.5 billion would help Ambac Assurance remain at its “AA” level.
Moody’s Investors Service and Standard & Poor’s said that if Ambac raised the additional capital, they would likely affirm Ambac Assurance’s “triple-A” ratings.
Even though S&P affirmed its ratings for Ambac Assurance, the agency said it might leave the company on “negative” outlook, reflecting the potential for more mortgage market deterioration.
Ambac said on Friday that it was slashing its expected quarterly dividend to a penny a share from 7 cents a share. In January, the company said it was cutting its expected quarterly dividend level to 7 cents from 21 cents.
Ambac also said last week it was no longer going to write business in the riskiest segments of structured finance, and it will no longer use credit default swaps to write insurance. Credit default swaps must be written down as their market value declines. Those write-downs may or may not foretell actual losses.
MBIA Inc has similarly scaled back this year, after having raised more than $2.6 billion of debt and equity from investors.
Ambac has already received commitments for essentially the whole $1-billion-share offering, a person briefed on the matter said. It may in fact increase the size of the offering, the person added. The shares are likely to be priced at Thursday’s closing price.
The mandatory convertible securities offering is expected to make annual payments to investors of somewhere around 8 percent to 8.5 percent. In 2011, investors must convert the units into Ambac shares, likely at a premium of 18 percent to 22 percent of the shares’ closing value on Thursday, when the securities will be priced. .
Banc of America Securities, Credit Suisse, Citigroup Inc. and UBS are acting as joint book-running managers on the stock and mandatory convertible offerings.
Reporting by Dan Wilchins; Editing by Jan Paschal, John Wallace and Gerald E. McCormick