"The market stresses contributing to Ambac's recent financial and organizational announcements are also evident at other financial guarantors, particularly those with significant mortgage and mortgage-related CDO exposures," Jack Dorer, a managing director at Moody's, said in a release.
Bond insurers have been rocked by concerns they could be hurt by guarantees they've written on complex debt securities that have plunged in value. Banks that have used those guarantees to hedge exposures have taken charges of at least $6 billion to reflect concerns bond insurers -- particularly junk-rated ACA Capital Holdings -- won't make good on their commitments. On Thursday, Merrill Lynch wrote down $3.1 billion in the value of its hedges.
Ambac said Wednesday it expects to report a loss of $5.4 billion on its portfolio of credit derivatives. In addition, Ambac conceded that it expects to see actual losses of $1.1 billion on some collateralized debt obligations linked to subprime mortgages, backing away from its long insistence that losses would be primarily on paper only.
To plug the hole, Ambac plans to sell at least $1 billion in securities and will cut its dividend by two-thirds. It also said Chairman and Chief Executive Bob Genader has resigned after 20 years at the company. The loss, and Mr. Genader's departure, troubled Moody's.
"This is a significant change in Ambac's view of the ultimate losses to be realized from these transactions," Moody's wrote. "This loss significantly reduces the company's capital cushion and heightens concern about potential further volatility within Ambac's mortgage and mortgage-related CDO portfolios."
Fitch Ratings put Ambac's AAA rating on watch for a downgrade last month, warning the company had four to six weeks to raise $1 billion. Without the capital, Fitch said Ambac would fall short of its requirements to hold AAA ratings.
The AAA rating is crucial for Ambac's business of insuring securities. Ambac has guaranteed principal and accumulated interest on $556 billion of debt, including mortgage bonds. Fitch has been more aggressive than other ratings agencies. Ambac said its current capital position meets or exceeds the AAA capital requirements of both Standard & Poor's and Moody's Investors service.
Fitch used similar language with MBIA, which last week raised another $1 billion in new capital and said it will slash its dividend by 62%.
MBIA Bonds Lose Value
MBIA's $1 billion in notes, sold Friday at 100 cents on the dollar with a 14% coupon fixed for five years, were trading Wednesday at 90 cents on the dollar, yielding 17%, according to Wayne Schmidt at AXA Investment Management. The hefty yield may not bode well for Ambac's capital raising efforts.
Fitch affirmed MBIA's AAA rating Wednesday and removed its ratings from negative-ratings watch. Fitch hasn't yet commented on Ambac's planned equity offering, but said Wednesday when it announced MBIA's rating that if the market migrates away from the use of bond insurance, MBIA and many of its competitors may have difficulty expanding their businesses in the future.
"Financial guarantors such as MBIA are facing heightened challenges and uncertainties with respect to ultimate subprime-related losses, their competitive positioning, as well as the critical demand and pricing for their products, including municipal bond insurance policies," Fitch said in its report.
The ratings agency also said Wednesday that it will continue to monitor the bond-insurance landscape in the coming months, and if negative fundamental trends appear to be enduring, the agency will reconsider its rating outlook on MBIA specifically or financial guarantors in general.
Still, the agency noted that "fundamental trend for bond insurance could stabilize during 2008, as companies look to streamline their portfolios and focus greater attention on less capital intensive and more stable asset classes at acceptable returns on capital."
Morgan Stanley analyst Ken Zerbe questioned whether Ambac would be able to accomplish its planned equity offering and questioned how much the company might try to raise. "First, the company has only guided toward raising "at least" $1 billion of equity and equity-linked securities," Zerbe said, adding that it is "unclear if the company will actually be able to raise the equity," due to investor hesitance.
At the heart of the crisis is concern about bond insurers' decision in recent years to stray from their core role guaranteeing municipal debt to providing guarantees on complicated debt securities amid a boom in structured finance. Many of those securities are underpinned by subprime mortgages that are plummeting in value.
Ambac guaranteed $38 billion of debt linked to subprime mortgages, or poor quality home loans, which have fueled the ongoing credit freeze. The company is also exposed to $45 billion of other mortgage investments.
Standard & Poor's, in a report released Tuesday, pointed to "the growing economic consensus that U.S. home-price declines will be larger than previously forecasted and that the slump in the U.S. housing market is expected to last far longer than previously anticipated."
S&P said as a result it has made "fundamental changes" to its assumptions for U.S. residential mortgage-backed securities that could affect bond insurer ratings.
Pressure continues to build on U.S. bond insurers, as Moody's Investors Service and Standard & Poor's signaled fresh consideration of companies' all-important AAA ratings and markets soured further on the sector amid deepening losses.
The reports sent shares of the nation's two biggest bond insurers plunging for a second-straight day. Market leader MBIA Inc. was recently down 25% to $10.08, while Ambac Financial Group Inc. sank 44% to $7.25 after dropping 38% Wednesday, a decline which cost the company more than $800 million in market capitalization.
Moody's said late Wednesday that it had placed its ratings on Ambac on review for a downgrade, after the country's second-largest bond insurer significantly stepped up its expected losses from insuring complicated securities backed in some cases by subprime mortgages. Moody's also said it will be evaluating "in the near term" the extent to which its ratings of other firms in the industry will be affected by the sector-wide pressures that produced the losses at Ambac.
"In view of the uncertainty generated by Moody's surprising announcement, Ambac is assessing the impact of this action on the company's previously announced capital plan," Ambac said Thursday.
Less than a month after completing a review of the highest-rated U.S. bond insurers to assess whether they held enough capital to deserve their stellar ratings, ratings company Standard & Poor's also is beginning to re-evaluate the sector's ratings to take into account its new, more dire view of the U.S. housing market downturn. The review should be completed by the end of next week, a spokeswoman said.
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