Ambac cuts dividend, replaces CEO

NEW YORK, Jan 17, 2008 (AP via COMTEX) -- ABK | news | PowerRating | PR Charts -- Bond insurer Ambac Financial Group Inc. lost more than a third of its market value Wednesday after it slashed its dividend by two-thirds, replaced its chief executive and said it would write down $5.4 billion from its portfolio.

Ambac also said it plans to raise $1 billion with new stock and other instruments, part of a critical effort to maintain its "AAA" financial strength rating.

The shares tumbled $8.17, or 38.7 percent, to $12.97 Wednesday.

Fitch Ratings has warned it would downgrade Ambac if it was unable to raise at least $1 billion to cover potential future losses. Bond insurers essentially need a "AAA" rating to continue booking new business.

"As of the day Ambac gets funding, it should be able to keep its rating," said Donald Light, a senior analyst with Celent LLC. After that point, though, Light said it is anyone's guess if the $1 billion boost in capital will ultimately be enough.

"If the projected range of losses gets much worse, then the amount of capital needed goes up," Light said. That could put Ambac in the precarious position of having to raise even more capital.

For the last decade, Wall Street firms bundled and sold pools of mortgages, auto loans, credit card bills and other loans to investors. The riskiness of these securities was thought to be offset by the promise insurers like Ambac Financial would step in to make principal and interest payments if issuers defaulted.

Because default rates have been low, bond insurers' earnings and share prices had soared -- until recently.

The fear is that Ambac and its competitors, even with new capital, might not be able to cover all their potential claims. Delinquencies and defaults among mortgages have surged and the loan troubles are spilling into other parts of the market.

One of Ambac's chief competitors, MBIA Inc., recently sold $1 billion in bonds to ensure its "AAA" rating would remain intact. But it had to pay a reported 14 percent interest rate on its notes to attract investors.

Access to capital to cover potential future claims is not Ambac's only worry, though. The company said it will take a $5.4 billion write-down on its credit derivative portfolio during the fourth quarter. The write-down and other items will lead Ambac to post a net loss of up to $32.83 per share for the quarter.

The bond insurer expects to report an operating loss, which excludes the write-down, of up to $5.80 per share for the quarter.

Ambac also replaced its chief executive. Board member Michael Callen will become chairman and interim CEO; outgoing CEO Robert Genader will retire effective immediately.

Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co., cut his price target on the stock to $18 from $30 and lowered his rating to "Market Perform" from "Outperform."

Stelmach anticipates Ambac will now earn $2.90 per share in 2008, down from a previous estimate of $7.40 per share.

The new dividend is 7 cents, down from 21 cents previously. A number of troubled financial companies have slashed their dividends as an easy way to preserve capital, among them Citigroup and MBIA.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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