Wednesday, December 19, 2007 6 comments ++[ CLICK TO COMMENT ]++

S&P Releases Bond Insurance Stress Test Results

I thought S&P would not release their stress test results so soon but they just did. It is mostly along the lines of Moody's report from last week. Two relevant press releases for the results are here and here. Here is the relevant info for Ambac:

We affirmed the 'AAA' financial strength and financial enhancement ratings of Ambac Assurance and the 'AA' debt ratings of Ambac Financial Group, Inc. but the outlooks have been changed to negative. The rating affirmations reflect the fact that Ambac's adjusted capital cushion of between $1,750 and $1,800 million is in line with its modeled stress losses. The announced reinsurance transaction with Assured Guaranty Re Ltd. was an important addition for Ambac, adding approximately $250 million on a risk adjusted basis to its capital cushion. The negative outlooks reflect the potential for further mortgage market deterioration relative to the company's marginally adequate capital cushion.

Ambac's outlook was cut to negative from stable. Well I guess we know how much that $29 billion reinsurance transaction provided: $250 million of capital. That's kind of low but it gives the kind of transaction that is required to raise capital. The next step is to wait and see how Ambac raises capital. It is really tough to issue shares alone (even if you issue 20% of market cap that will only bring in around $500 million) so there is likely to be multiple paths taken.

In another note, not too surprising to bond insurance market followers, ACA is on its way to winding down operations. It is in serious trouble and unless it gets more capital (CIBC and others holding insured assets are considering investing some money) it will likely have to close up shop. But it's likely game over for shareholders (any capital injection will likely wipe out shareholders).

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6 Response to S&P Releases Bond Insurance Stress Test Results

December 19, 2007 at 5:01 PM

I think the negative outlook is just S & P's way of hedging potential issues in the future.

One interesting point from this release is that it puts MBI and ABK in the same bucket, just as Moody has done. It seems MBI is not safer after all. I got the feeling that the team in ABK is probably better than MBI. This will be important in the long haul.


December 19, 2007 at 5:10 PM

As I remarked in one of my prior posts, I'm actually SHOCKED that MBIA is in the same boat as Ambac. You can tell the fortunes of these two by noticing how the stock of MBIA has underperformed Ambac in the last few weeks. There is good and bad in this, from Ambac's point of view.

The good is what you mentioned. Namely, underwriting at Ambac looks much better than MBIA. Ambac's management certainly looks stronger. I mean, MBIA's top management was replaced so that is a minor weakness for them; whereas the Ambac team has been with the firm for a while now.

The bad news is... I wonder if the rating agency models are underestimating CDO losses. CDOs are very hard to value and I'm surprised that Ambac's massive CDO portfolio is holding up better than MBIA's RMBS portfolio (I expect municipal bonds to be of similar quality for both given their experience writing insurance on those for several decades).

Anyway you must be happy. Looks like the market is gaining some confidence in Ambac. Even with the sell-offs and volatility in the broad markets, Ambac stock is holding up well. I guess people still on the sidelines, like me, don't benefit from this but, as Peter Lynch (or was it John Templeton) has remarked, I'm willing to wait until the falling knife sticks in the ground :|

December 20, 2007 at 9:17 AM

MBI is down big today on analyst comments re: CDO exposure (JP Morgan - not sure yet). They talk 8 bill in exposure but, as I haven't seen the analyst notes, don't know if they reference vintage or not. Of course, any mention of CDO's, within the current market hysteria, does not help any of the monolines.

MBI has posted some CDO exposures on their website, within their press release yesterday (in cast link does not work). What do you think?

December 20, 2007 at 9:20 AM

Bond insurer MBIA

[MBI 27.02 --- UNCH (0%) ] down from $27 to $22 this morning. Morgan Stanley, in a note this morning, said "MBIA published an updated list of its CDO exposures. It disclosed that it has a massive $8.1 billion of exposure to CDO-squared transactions (where the underlying collateral is more than 75% CDOs and the remainder is mostly RMBS). Of the total, $5.1 billion was written in 2006 and 2007. We are shocked that management withheld this information for as long as it did."

December 20, 2007 at 10:20 AM

wow... MBIA is getting clobbered on their latest CDO-squared disclosure. One thing you have to give to Ambac is that they fully disclosed their exposures as much as they were able to. The stock got clobbered when they did that but at least the information is out there for the market to figure out.

I don't know enough about MBIA to say whether the sell-off is irrational or if this is new information that is materially worse than anyone knew.

December 20, 2007 at 11:12 AM

I believe this was the same analyst that had AMBAC pulling its hair out, and helped drop ABK from 41 to 21. AMBAC ended up posting a full page response to Morgan Stanley on Nov 2, which helped stabilize the stock. The response is posted in AMBAC's headlines.

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