Wednesday, March 5, 2008 4 comments ++[ CLICK TO COMMENT ]++

Ambac's Dissapointing Capital Raising Plan

UPDATE: Added a note at the bottom about potential price for the equity note.

Well, Ambac finally announced their plan to raise capital. The market was dissapointed--so was I--with a watered down version of the ideas that were floated around. The final plan entails issuing $1 billion worth of shares and $500 million worth of mandatory convertible stock (preliminary SEC filings here and here). Both of these are public and seem like an underwritten deal so Ambac will get the capital. None of the specific details (such as price) have been disclosed yet so it's hard to give any strong opinion on the actual offers.

Initial Thoughts

The deal is much smaller than I had anticipated. I thought they were looking at a minimum of around $2 billion. The final deal is nothing special and could have been executed months ago. There aren't any committed investors (except possibly for the mandatory convertible shares) so it is a letdown in my eyes. The upside to a smaller deal is that shareholder dilution will be smaller.

Without knowing the price it's hard to say if this is a "good deal" for existing shareholders. I also don't know if this is an attractive offer to consider purchasing for those with high risk tolerance. All I can say is that the mandatory convertible stock is very risky but may be attractive if you ar superbullish (it'll pay a coupon and will be convertible).

Although the final deal is unspectacular, I suspect there was a lot that doesn't show up in the final score. My guess is that Ambac was spending a lot of time with the 'split' strategy and it failed after the rating agencies wanted more capital. I would also guess that the higher capital amount initially mentioned was related to the split. The current capital is likely enough to satisfy Moody's and S&P (Ambac will have a hard time getting back the AAA rating from Fitch. It's easier to lose ratings than gain them). It almost looks like Ambac is trying to raise the least amount possible (i.e. trying to minimize shareholder dilution).


UPDATE: Reuters mentioned that the mandatory convertible note may be priced with a yield of around 8% to 8.5%, with a conversion price set 18% to 22% above Thursday's closing price. The note will likely end up listed on the secondary market at some point (my guess) so there is little need for any brave small investor to rush and buy the note. Overall, this is all dissapointing. Instead of a rights offering, which could have benefitted shareholders more, we end up with a straight equity offering and a mandatory convertible note.

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4 Response to Ambac's Dissapointing Capital Raising Plan

cak
March 5, 2008 at 11:01 PM

Great posts the last few days, re: Whitman, etc.

Did notice this in a WSJ article


"...underwriters, including some of the banks that had been part of bailout talks, have committed privately to supporting the deal if there is a lack of demand, while private-equity investors have agreed to buy a certain portion of the shares on the open market, according to investors who said they were briefed by Ambac.
"
"The lack of a formal "backstop," in which banks agree to buy up any unsubscribed shares in a stock offering, indicated that the bank consortium had decided against committing capital to the deal. That confounded investors who didn't know about the underwriters' private agreement, leading them to sell shares...."









Ambac's Capital Plan: Far Enough?
Rating Firms, Investors
Look Askance at Move
As Crunch Risks Linger
By KAREN RICHARDSON and LIAM PLEVEN
March 6, 2008

Ambac Financial Group Inc. announced that it aims to raise $1.5 billion in much-needed capital, disappointing some investors who had bet on a possible Wall Street bailout and expected the bond insurer to raise as much as $3 billion.
[Chart]

While the plan fended off downgrades from rating firms Moody's Investors Service and Standard & Poor's Ratings Service, which have kept Ambac Financial Group's triple-A rating on review for downgrade, the plan failed to return Ambac's ratings to the coveted "stable" status. Moody's and S&P said they would likely place Ambac on "negative" outlook -- a step further away from imminent downgrade -- if it successfully raises the capital but left open the possibility of cuts in the future.

"They still have a lot of work to do, especially in containing the risk in their subprime portfolio. Until they do, we don't think there's a lot of lift potential," said Thomas Abruzzo, a managing director at Fitch Ratings. Fitch cut Ambac in January to double-A and is still reviewing it for downgrade.

But underwriters, including some of the banks that had been part of bailout talks, have committed privately to supporting the deal if there is a lack of demand, while private-equity investors have agreed to buy a certain portion of the shares on the open market, according to investors who said they were briefed by Ambac.



Ambac's Capital Plan: Far Enough?
Rating Firms, Investors
Look Askance at Move
As Crunch Risks Linger
By KAREN RICHARDSON and LIAM PLEVEN
March 6, 2008

Ambac Financial Group Inc. announced that it aims to raise $1.5 billion in much-needed capital, disappointing some investors who had bet on a possible Wall Street bailout and expected the bond insurer to raise as much as $3 billion.
[Chart]

While the plan fended off downgrades from rating firms Moody's Investors Service and Standard & Poor's Ratings Service, which have kept Ambac Financial Group's triple-A rating on review for downgrade, the plan failed to return Ambac's ratings to the coveted "stable" status. Moody's and S&P said they would likely place Ambac on "negative" outlook -- a step further away from imminent downgrade -- if it successfully raises the capital but left open the possibility of cuts in the future.

"They still have a lot of work to do, especially in containing the risk in their subprime portfolio. Until they do, we don't think there's a lot of lift potential," said Thomas Abruzzo, a managing director at Fitch Ratings. Fitch cut Ambac in January to double-A and is still reviewing it for downgrade.

But underwriters, including some of the banks that had been part of bailout talks, have committed privately to supporting the deal if there is a lack of demand, while private-equity investors have agreed to buy a certain portion of the shares on the open market, according to investors who said they were briefed by Ambac.

There may still be risks ahead for Ambac, the world's second-biggest bond insurer by the amount of its guaranteed debt outstanding.

A key part of what has put bond-insurer ratings under such pressure is projections about the possibility of rising losses in the mortgages that back up securities the firms have insured. If those projections get more dire, it is possible that ratings services could require more capital.

Ambac plans to raise at least $1 billion by selling common stock and $500 million from the sale of equity units, a type of convertible security that gives the holder the option to buy newly issued common or preferred shares in May 2011.

All but $100 million of the proceeds will go to buttressing Ambac's wholly owned unit that guarantees the principal and interest on bonds in the event of default. The $100 million will go to the public holding company, which will use the funds to help pay down debt. Ambac said it is also considering raising additional capital.

Ambac's plan comes more than a month after its biggest rival, MBIA Inc., raised $2.6 billion from new and existing shareholders, including private-equity firm Warburg Pincus LLC. MBIA's moves led to the affirmation of its triple-A ratings from Moody's and S&P, although it remains on negative outlook.

Reflecting both investor disappointment and the large amount of earnings dilution that will likely result from the offering, shares of Ambac fell 19% in 4 p.m. New York Stock Exchange composite trading after it released its stock-offering prospectus. The shares, which had climbed in recent days on expectations of the move, were down $2.02 to $8.70. Ambac's market value is now less than $1 billion, so a $1 billion stock offering would dilute per-share earnings by more than 50%.

"In this offering, we are targeting our core investor base, the long-term holders of our stock, who have been loyal to Ambac," Michael Callen, Ambac's interim chief executive, said in a statement.

The lack of a formal "backstop," in which banks agree to buy up any unsubscribed shares in a stock offering, indicated that the bank consortium had decided against committing capital to the deal. That confounded investors who didn't know about the underwriters' private agreement, leading them to sell shares. Citigroup Inc. and UBS AG, which were part of the consortium, are also underwriters of the stock offering.

While Ambac now says it will exit from risky parts of the structured-finance business -- including writing policies for debt securities backed by mortgage, credit-card and auto loans -- and focus on the municipal-bond business, its plan falls short of a formal separation.

The offering document revealed a dispute between underwriters, including some of the consortium banks, and Ambac over loss estimates. Some underwriters "have made estimates of our losses, estimates of credit impairments and mark-to-market losses that in some cases materially exceed the amounts we have reported," Ambac wrote. Ambac reported $6 billion last year in mark-to-market losses, which it says aren't indicative of real future losses.

cak
March 5, 2008 at 11:03 PM

Sorry for the cut & paste job. WSJ articles can't be hypertexted.

March 6, 2008 at 10:46 AM

I don't know what Ambac is doing but their deal is very weak. All these rumours cannot be trusted so I have no idea if anyone has committed anything. If anyone was seriously interested, they would have legally committed.

The fact that the deal wasn't backstopped by anyone or has a fixed offer price is going to kill the stock (and existing shareholders). The lower the stock price falls, the better it is for anyone that was rumoured to be "committed" to this deal. Without any legal committment, there is nothing to stop the banks, assuming they were going to buy shares in the first place, from turning this into an arbitrage play by shorting the stock and subscribing to the new offer.

Furthermore, if Ambac went with the dilution route then I don't know why they didn't try to raise a little bit more. We already have analysts saying it isn't enough capital. Admittedly those analysts are bearish now and were completely wrong on the bullish side all throughout last year. But nevertheless, it introduces DOUBT into Ambac's ability to honour their insurance. This isn't going to help them write new business. Unless you assume that Ambac was strong-armed into maintaining its AAA rating by the government, the whole point of keeping the AAA is to write new business. Otherwise, run-off is the best for shareholders.

I'm also not sure why they didn't do a rights offering. Management says existing shareholders can participate now but it is a joke. Selling shares in the public market is not some benefit to shareholders. I would have preferred if they gave existing shareholders a right and priced it at some ridiculously low price of like $5--because the way things are unfolding, the stock may drop to that no matter what.

Ambac really needs to fire their bankers and get someone better. If I'm not mistaken, their original bankers were Credit Suisse (I believe) who leaked the Ambac security information to Bill Ackman for this open source model. Well, I'm not sure who is their banker now...

I'm truly dissapointed with management yet again. The only thing that may save this strategy is that the price may keep dropping and it'll become attractive to distress investors, private equity, and speculators. Doesn't help existing shareholders though...


For what it's worth, the suffering won't get much worse. Ambac won't be making news for much longer.


Sorry about the rant :)

Anonymous
March 7, 2008 at 2:06 PM

Ambac shareholders were sold down the river by management. They diluted their owners to save their jobs. Period. No other explanation.

Either they believe their mark to model or they don't. If they do, then just getting downgraded would provide much better outcomes for shareholders.

If they don't, then splitting the company was their get out of jail card. I can understand why the banks didn't want to put in money, just to get an eventual downgrade.

This is the worst possible outcome for shareholders.

Then to have the CEO go on CNBC and brag about how ON ONE HAS LOST THEIR JOB is beyond the pale.

They aren't writing any new business and won't in the near future. Why do they need any of the expenses?

This dilution was done for the banks but what was done for them? Other then giving management continuing paychecks.

Hey.....consider this tuition in the world of investing. Class 101, the Agency Problem.

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