Shortly after trading in the company’s stock was halted Wednesday, Ambac released details of a capital strengthening plan that left investors disappointed. The plan involves a common stock offering of $1 billion and an additional $500 million in convertible equity units that must be converted to common stock in May 2011, according to a press statement released by Ambac Wednesday afternoon. Earlier investor speculation had centered around a potential break-up of the monoline’s business. Investors that spoke with Housing Wire after Ambac’s announcement said they expected much more, even if the possibility of a split seemed remote. “Who wants to throw money at a monoline right now, especially one heavily exposed to the ABS and CDO markets?” said one hedge fund manager, who asked not be named. Ambac CEO Michael Callen, however, said the plan was targeting the company’s core long-term investor base. “This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base,” he said. “We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement.” The Wall Street Journal found sources critical of the deal as well:
… more important, investing pros said the company’s offering plan carries risks of its own and does little to solve the broader credit crisis that has gripped Wall Street for months. “People are looking around saying, how are they going to sell all this stock?” said Michael A. Church, portfolio manager at Church Capital Management, in Yardley, Penn. “I don’t think it’s going to be easy to price. Good luck to the underwriters who, by the way, will probably be the same banks that have been burned” by bad credit bets recently.
Rating agencies appeared to split on whether the move would be enough. Fitch Ratings said in a press statement that even if Ambac succeeds in raising an additional $1.5 billion, it likely would only be enough to bolster ratings at the AA-level, keeping the monoline locked out of that agency’s AAA insurer ratings class. Moody’s Investors Service, however, indicated that the additional capital would likely be sufficient to support confirmation of a ‘AAA’ rating from the agency. Ambac shares plummetted more than 15 percent after the news, trading at $9.02 towards the end of Wednesday’s trading session. Disclosure: The author held no positions in ABK when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
