Thursday, July 3, 2008 9 comments ++[ CLICK TO COMMENT ]++

Ambac Authorizes $50 million Share Repurchase Plan

UPDATE: I was just thinking about the fact that the capital raise announced back in March seems like it hasn't been completed yet. The deal occurred under murky circumstances--recall CNBC and the rumours--and I'm not sure if anyone underwrote or backstopped the deal. If the deal was underwriten or backstopped in some manner, there are going to be huge losses for the involved firms if they didn't hedge by shorting the stock (I think they would have hedged if they were allowed.) The book-runners were Credit Suisse Securities, Citigroup Global Markets, Banc of America Securities, UBS Investment Bank, Keefe, Bruyette & Woods, Dresdner, Kleinwort Securities, BNY Capital Markets, and KeyBanc Capital Markets. But I'm just guessing on potential losses; for all I know, most of the offerring may have been sold already. It's certainly an interesting way to create wealth by issuing shares at high price and buying back at lower prices. The buyers at the high price may not be happy but this is a good way of creating shareholder wealth (if the stock price is overvalued (I'm not saying Ambac was), the easiest way to create wealth is to issue shares at a high price and buy back when they fall).

Ambac announced a $50 million share repurchase plan. It sounds small but given that the market cap has dropped to $350 million and around 26% of the shares are sold short, it's quite sizeable.

Ambac Financial Group, Inc. announced today that its Board of Directors has authorized up to $50 million for share repurchases of its common stock. The repurchase of shares under the Stock Repurchase Program is conditioned up the completion of the offering of shares by the underwriters of its March 2008 offering. We are unable to predict when the offering will be completed.

Ambac President and Chief Executive Officer, Michael Callen, stated, “The Board of Directors of Ambac believes that share buyback, when permitted under regulatory rules and corporate policy, represents a good investment of our capital and reinforces our confidence in the long-term stability of our company.”


Often share repurchase plans amount to nothing but I think Ambac will carry it out in this case. The amount is quite small in dollar terms and as long as Ambac doesn't feel the regulators have a problem with it (regulators have no say in what the holding company does but it's good to keep them happy) it makes a lot of sense. If you actually believe the company is a going concern, it is a very efficient use of capital to retire shares. In addition, it keeps the shares trading above $1 and postpones any delisting threats.

I suspect Ambac will use the cash it has at the holding company to buy back shares. This is negative for bondholders.

I think short-sellers and their allies are going to go balistic if Ambac actually buys back stock... expect to see some negative comments from the usual suspects...

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9 Response to Ambac Authorizes $50 million Share Repurchase Plan

synchro
July 3, 2008 at 4:52 PM

I don't understand why any shortsellers would still be around this carcass. As a rule I start covering once the stock drops below $10. When the stock drop below $5, I'm usually out of it by then. The risk-reward is much harder to calcualate once it becomes such a low-priced stock. I certainly wouldn't press my bet.

As to the stock-buyback, it's mainly a farce and a dying gasp. As a spectator watching this psycho-drama, i can only say that Management, shareholders, and the shortsellers deserve each other's company at this stage of the sinking ship.

sc
July 3, 2008 at 7:28 PM

I was thinking they did it to prop up the stock so it could continue to trade on NYSE.

I tend to get out at $2 when shorting as there are weird things that happen when stocks fall below there.

July 3, 2008 at 7:55 PM

I have never shorted any stock directly in my life (only exposure is through inverse funds) but, although I don't think short-selling is the way to investment success, I have to give props to you guys. Shorting is definitely not easy and taking a position with a max 100% upside doesn't seem attractive either. But if it works for you, go ahead...

As for Ambac, they are nowhere near being delisted any time soon (I think the rule for NYSE is that the stock has to trade below $1 over a 6 month period or something like that--don't quote me on that)... I think buying back stock makes sense if they have excess cash at the holding company. All this proposed buyback realy means nothing in the scheme of things. The real big question is 2nd quarter earnings. The stock can easily fall 30% or rise 30% on that...

July 3, 2008 at 7:57 PM

Also... isn't there some difficulty shorting below $2 or something like that? I vaguely remember encountering something about that... anyone know if there is a rule or some limitation below $2? Maybe it's margin limitation?Can you use margin on stocks below $2?

synchro
July 4, 2008 at 2:32 AM

Once a stock falls below $5, it is typically not marginable (i.e., can't be borrowed), which means there typically won't be enough stock to initiate short positions in size. Why anyone would initiate a short position once it falls below $5 is beyond me.

As to shorting as an investment strategy, i would certainly not recommend it to anyone who takes a fundemental approach to investing. If you are of the stubborn sort who has a lot of conviction (and ego), shorting on fundementals is a sure way to get your face ripped off in a squeeze.

In my opinion, you have to have a trading/technical approach w/ tight risk controls to short stocks. When you short stocks, the difference between being the hunter and the hunted turns on a dime.

The lucrative part of shorting is that stocks drop a lot quicker than they go up. What takes months or years to rise can only take weeks to be undone. Cases in point: MBIA, ABK, AIG, WM, CFC, New Century, NFI, LEND.

synchro
July 4, 2008 at 2:38 AM

I shorted ABK in July at $67. I covered my last short in the stock in December at $25. After New Year, the stock became tremendously volatile as it became fodder for both latecoming shortsellers and short squeeze longs. Once that happens, I decided to say away.

July 4, 2008 at 1:01 PM

SYNCHRO: "In my opinion, you have to have a trading/technical approach w/ tight risk controls to short stocks. When you short stocks, the difference between being the hunter and the hunted turns on a dime."

I notice most short-sellers are technical-oriented. There are some exceptions like William Ackman and possibly Jim Chanos, who short on fundamentals, but the majority you see on TV/internet or on blogs seem to rely mainly on technicals. Anyway that's my impression...


SYNCHRO: "I shorted ABK in July at $67. I covered my last short in the stock in December at $25. After New Year, the stock became tremendously volatile as it became fodder for both latecoming shortsellers and short squeeze longs. Once that happens, I decided to say away."


I went long slightly after that around that price. It certainly has turned out to be an interesting investment. It may end up being the worst or the best. Time will tell... there is nothing like the stock falling 70% 3 days after I invest a huge chunk of my portfolio :(

AX
July 4, 2008 at 7:41 PM

Sivaram, are you implying that you bought Ambac around $25? Please say no! Anyone who doesn't have short exposure in this market either through puts directly or inverse ETFs such as you own is in complete denial about this market.

Ax

July 5, 2008 at 9:15 AM

Yes I bought Ambac around $25 early this year...

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