More Junk

Ambac Financial Group Inc. scrapped a plan to raise equity capital after the bond insurer's shares plunged 70 percent in the past two days, putting its AAA credit rating in jeopardy.

Without new money, New York-based Ambac risks losing the top ranking it depends on to sell bond insurance. Ambac, the second- largest financial guarantor, may have to stop writing insurance or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York.

``This is a stunning development,'' Haines said. Ambac will probably be downgraded by Moody's Investors Service and Fitch Ratings, Haines said.

Ambac blamed ``market conditions'' and scrutiny by ratings companies for its decision. The company said two days ago it would sell $1 billion of shares or convertible notes, a plan that provoked a boardroom dispute and led to the departure of Chief Executive Officer Robert Genader. A downgrade of Ambac would throw doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by the company.

The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg.

Shareholder Relief

Ambac, which traded at more than $96 eight months ago, rose 47 cents to $6.71 at 1:53 p.m. in New York Stock Exchange trading. Ambac's market value has fallen 93 percent to $682 million in the past 12 months, meaning a stock sale would have more than doubled its shares outstanding.

Shareholders are ``apparently relieved that the company won't be rushing into a massively dilutive equity offering,'' Kathleen Shanley, an analyst at bond research firm Gimme Credit LLC in Chicago, said in a note to clients today.

Moody's said this week it may cut Ambac's ratings after the company forecast writedowns of $3.5 billion on subprime-mortgage securities. Fitch demanded the company raise $1 billion by the end of the month. Standard & Poor's today said it may cut Ambac's rating because its capital-raising options are ``impaired.''

``To the extent that Ambac is unable to raise sufficient capital over the near term, in relation to its increased capital needs, these ratings could be lowered,'' S&P said.

Michael Callen, the 67-year-old named interim CEO of Ambac, this week said the company planned to raise capital in ``an accelerated time frame.''

Shareholder Evercore Asset Management LLC yesterday called on Ambac to shelve the plan and relinquish its AAA rating. Ambac should allow the policies it has written to run off, Evercore Chief Investment Officer Andrew Moloff said yesterday in a letter to Ambac's board. Evercore said Ambac had ignored a previous letter it had sent.

MBIA's Capital

MBIA Inc., the largest bond insurer, was also placed under review by Moody's this week. The company today said it was surprised by the ratings company's decision.

MBIA raised $1 billion last week in the sale of surplus notes and last month entered a deal to sell $1 billion of equity to private-equity firm Warburg Pincus LLC. Both companies slashed their dividends and took out reinsurance on some securities to help shore up capital.

The surplus notes plunged as low as 70 cents on the dollar today, indicating a yield of about 25 percent, traders said. MBIA dropped $1.05, or 11 percent, to $8.17 on the New York Stock Exchange, extending its 56 percent decline this week.

Bankruptcy Chance

Ratings companies, which affirmed their assessments a month ago, are scrutinizing bond insurers to ensure they have enough capital to protect against losses. S&P yesterday said industry losses on subprime securities will be 20 percent more than it initially forecast.

Ambac has a capital shortfall of about $400 million under the new assumptions, S&P said.

ACA Capital Holdings Inc.'s ratings were cut 12 levels to CCC last month, forcing the insurer to seek permission from clients to avoid posting collateral. Those agreements end at midnight tonight and the company must forge new accords or face potential delinquency proceedings by the Maryland insurance regulator. New York-based ACA guarantees more than $75 billion of debt.

Prices for credit-default swaps that pay investors if Armonk, New York-based MBIA or Ambac can't meet their debt obligations imply a 73 percent chance the companies will default in the next five years, according to a JPMorgan Chase & Co. valuation model.

Credit-Default Swaps

Contracts tied to MBIA's bonds have risen 10 percentage points the past two days to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.

Credit-default swaps on Ambac, the second-biggest insurer, rose 11.5 percentage points to 26.5 percent upfront and 5 percent a year yesterday, prices from CMA Datavision show. They were unchanged today.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Ambac's $400 million of 6.15 percent bonds due in 2037 have plunged by 25 cents on the dollar this week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield has soared to 17.6 percent from 10.5 percent and the extra yield investors demand over government securities with similar maturities has widened 7.2 percentage points to 13.4 percentage points.