One of the vital cogs in the US credit markets, Ambac Financial, took steps to haul itself back from the precipice yesterday with a plan to sell $1.5bn in stock and equity units.
If successful the sale should bring relief to the so-called "monoline" insurers which guarantee hundreds of billions of dollars of credit market instruments against the risk of default. Any cut to the gold-plated triple-A credit rating of Ambac or its rival MBIA could have triggered a cascade of fresh losses for Wall Street banks.
The banks are relying on the monolines to cover further losses on many credit market investments. Loss of the triple AAA rating would jeopardise $556bn in municipal and asset-backed securities which are insured by Ambac and force many investors to sell debt or reduce their holdings.
The Ambac fundraising will be divided into $1bn of shares and $500m of equity units, the company said. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt, including municipal bonds.
The banks which are helping Ambac to raise money will be helping to avoid writedowns on the insured debt they own in the process. If the top-rated bond insurers lose their credit ratings banks stand to lose up to $70bn. MBIA's ratings were confirmed by Moody's and S&P last week but another, FGIC, lost its AAA at the three ratings companies.
News of the sale, which will dilute existing shareholdings, prompted a 19 per cent fall in Ambac shares in afternoon trade.
Moody's Investors Service said that the fundraising and other capital strengthening activities are likely to see Ambac's AAA rating confirmed. Standard & Poor's, which has Ambac on review for a credit downgrade, said if the capital raising was successful it would probably take Ambac off review but give it a negative outlook, indicating the risk of a downgrade over the long term.Reuse content