Ambac Will Cut Dividend, Raise $1 Billion in Capital

(Bloomberg) -- Ambac Financial Group Inc. ousted its chief executive officer, slashed the dividend 67 percent and will raise more than $1 billion to preserve its AAA credit rating after announcing the biggest-ever writedowns by a bond insurer.

The New York-based company fell as much as 28 percent on the New York Stock Exchange, extending a 76 percent decline in the past 12 months. Ambac will report a loss after reducing the value of securities it guarantees by $3.5 billion, according to a statement today.

Chairman and CEO Robert Genader, 60, will leave after presiding over the company's first ever losses and a decline in shares that wiped out $7.8 billion in market value. Ambac's writedowns, which exceeded those announced last week by larger rival MBIA Inc., failed to convince investors that the worst is over. Ambac and MBIA remain under scrutiny by ratings companies and regulators after their guarantees of bonds linked to subprime mortgages began plunging in value.

``The perception is that their underwriting standards were insufficient and they weren't on top of their business,'' Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said in an interview. ``This announcement still just says `We're a black box. Deal with it'.''

Ambac, which put its AAA stamp on $556 billion of securities, probably will end up needing more capital because the credit quality of the debt it guarantees will decline, Tavakoli said. Standard & Poor's yesterday changed the way it reviews subprime securities to increase its assumptions for losses, indicating it may further lower credit ratings.

Shares Fall

Board member and former Citigroup Inc. executive Michael Callen, 67, will become chairman and interim CEO, Ambac said.

The reduction in the quarterly dividend to 7 cents from 21 cents reverses a commitment made just three weeks ago to retain the payout. Ambac said it will report a net loss of $32.83 a share for the quarter, equating to more than $3 billion based on the company's 101 million shares outstanding.

Ambac declined $5.79 to $15.35 at 10:35 a.m. in New York after earlier falling as low as $15.12. MBIA dropped $1.91, or 12 percent, to $14.14.

``It's one thing to have a plan and another to have a plan that is credible and will be a long-term fix,'' said Donald Light, an analyst with Boston-based consulting firm Celent. ``Is this just a down payment in what's going to be a series of payments of uncertain length?''

`Clock Ticking'

Ambac is under pressure to come up with enough capital to satisfy Fitch Ratings, which threatened to cut the company's AAA rating unless it raised $1 billion. The bond insurers are under scrutiny from Fitch, Moody's Investors Service and S&P to increase their capital after a slide in credit ratings of the debt they guarantee.

The loss of the AAA stamp of Ambac, MBIA, FGIC Corp. and other insurers would throw into doubt the ratings of $2.4 trillion of municipal and structured finance debt that the companies guarantee. It would also cripple their ability to keep underwriting new bonds.

``The clock is ticking for all these companies,'' Robert Haines, an analyst with New York-based bond research firm CreditSights Inc., said in an interview before the announcement.

The infusion of capital, which may include the sale of shares and convertible stock, will satisfy Fitch, Ambac said in the statement today. Ambac said it may also reinsure more of its bonds or sell debt securities to shore up capital.

 

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