Ambac Provides Financial Details Related to Collateral Requirements of Its Investment Agreement Business
07 Juillet 2008 - 11:19PM
Business Wire
Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced
that in response to persistent and unfounded speculation regarding
Ambac�s liquidity situation, it has released information about
collateral requirements and terminations of its investment
agreement business related to recent actions by the rating
agencies. �Despite the challenging current environment, it is
important for us to continually communicate that we have ample
liquidity to manage our commitments going forward,� said Chairman
and Chief Executive Officer, Michael Callen, �Our company-wide
resources available are a multiple of any conceivable collateral or
termination requirement in our financial services businesses.�
Rating agency actions affecting Ambac Assurance Corporation (AAC)
during June resulted in $506 million of increased collateral
posting requirements in the investment agreement business and
investment agreement terminations of $270 million: The downgrade of
AAC by Standard & Poor�s to AA on June 5, 2008, resulted in an
incremental collateral posting requirement of approximately $76
million. Moody�s downgrade of AAC to Aa3 on June 19, 2008, resulted
in an incremental collateral posting requirement of approximately
$70 million and investment agreement terminations of approximately
$270 million. The action by Fitch to withdraw the ratings of AAC on
June 26, 2008, resulted in an incremental collateral posting
requirement of approximately $360 million. The current collateral
and termination obligations have been adequately covered by the
investment agreement asset portfolio. Aggregate collateral
requirements and terminations for the investment agreement business
at various AAC rating levels, starting with the lower of AAC�s two
current ratings (currently Moody�s at Aa3), are as follows: ($ in
billions) Current Aa3 � A+/A1 � A/A2 � A-/A3 Cumulative collateral
requirement $2.7 � $4.6 � $6.0 � $5.8 Cumulative terminations $0.3
� $0.6 � $0.6 � $0.9 Total cumulative collateral and terminations
$3.0 � $5.2 � $6.6 � $6.7 Market value of investment agreement
asset � � � portfolio at 5/31/08 $5.6 � $5.6 � $5.6 � $5.6 Market
value of investments in excess of / (deficient to) cumulative
collateral requirement and terminations $2.6 � $0.4 � ($1.0) �
($1.1) The book value of investment agreement liabilities at May
31, 2008, amounted to $6.9 billion (down from $7.7 billion at
December 31, 2007). The market value of the investment agreement
asset portfolio, including cash of approximately $400 million, as
of May 31, 2008, is approximately $5.6 billion. In addition, the
market value of interest rate derivative contracts held by the
investment agreement business is positive $160 million. Based on
May 31, 2008 investment agreement asset portfolio market values:
Upon a downgrade of AAC to A+ or A1, which Ambac believes is
unlikely, Ambac estimates that the investment agreement asset
portfolio has sufficient value to meet projected cumulative
collateral requirements and terminations. Upon a downgrade to A or
A2, which Ambac believes is unlikely, Ambac estimates that the
investment agreement asset portfolio is insufficient to cover the
projected cumulative collateral requirement and terminations by
approximately $1.0 billion. Upon a downgrade to A- or A3, which
Ambac believes is unlikely, Ambac estimates that the investment
agreement asset portfolio is insufficient to cover the projected
cumulative collateral requirement and terminations by approximately
$1.1 billion. In the event of cash and/or security shortfalls in
the investment agreement business, management anticipates utilizing
the resources of AAC (through inter-company transactions).
Utilizing the resources of AAC would allow time for the assets in
the investment agreement asset portfolio to recover in value and
would preempt claims on insurance policies issued by AAC and
prevent the realization of losses in the investment agreement asset
portfolio. Ambac is in discussions with the Office of the
Commissioner of Insurance of the State of Wisconsin (OCI) with
respect to its strategies for managing the collateral posting and
termination obligations of the investment agreement business. These
discussions have been positive. Ambac believes that it will obtain
OCI�s approval of its plans to address the collateral posting and
termination obligations of the investment agreement business in the
event of downgrades to the A/A2 rating level. AAC�s investment
portfolio is valued at approximately $12 billion with over $1
billion in cash and short-term securities at May 31, 2008. At the
A/A2 rating level, Ambac management would evaluate its various
resources and utilize those considered most appropriate to satisfy
the contractual obligations of the investment agreement business.
Management continues to closely monitor the cash requirements of
the investment agreement portfolio and manages the related cash and
securities portfolio accordingly. The Company expects to report its
second quarter 2008 earnings on August 6, 2008, and will provide a
comprehensive update on its financial services businesses.
Forward-Looking Statements This release contains statements that
may constitute "forward-looking statements" within the meaning of
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Any or all of management�s forward-looking
statements here or in other publications may turn out to be wrong
and are based on Ambac�s management current belief or opinions.
Ambac�s actual results may vary materially, and there are no
guarantees about the performance of Ambac�s securities. Among
events, risks, uncertainties or factors that could cause actual
results to differ materially are: (1)�changes in the economic,
credit, foreign currency or interest rate environment in the United
States and abroad; (2)�the level of activity within the national
and worldwide credit markets; (3)�competitive conditions and
pricing levels; (4)�legislative and regulatory developments;
(5)�changes in tax laws; (6) changes in our business plan, our
decision to discontinue writing new business in the financial
services area, to significantly reduce new underwriting of
structured finance business and to discontinue all new
underwritings of structured finance business for six months from
March 6, 2008; (7)�the policies and actions of the United States
and other governments; (8)�changes in capital requirements whether
resulting from downgrades in our insured portfolio or changes in
rating agencies� rating criteria or other reasons; (9)�changes in
Ambac�s and/or Ambac Assurance�s credit or financial strength
ratings; (10)�changes in accounting principles or practices
relating to the financial guarantee industry or that may impact
Ambac�s reported financial results; (11)�inadequacy of reserves
established for losses and loss expenses; (12)�default by one or
more of Ambac Assurance�s�portfolio investments, insured issuers,
counterparties or reinsurers; (13)�credit risk throughout our
business, including large single exposures to reinsurers;
(14)�market spreads and pricing on insured collateralized debt
obligations (�CDOs�) and other derivative products insured or
issued by Ambac; (15)�credit risk related to residential mortgage
securities and CDOs; (16)�the risk that holders of debt securities
or counterparties on credit default swaps or other similar
agreements seek to declare events of default or seek judicial
relief or bring claims alleging violation or breach of covenants by
Ambac or one of its subsidiaries; (17)�the risk that our
underwriting and risk management policies and practices do not
anticipate certain risks and/or the magnitude of potential for loss
as a result of unforeseen risks; (18)�the risk of volatility in
income and earnings, including volatility due to the application of
fair value accounting, or FAS 133, to the portion of our credit
enhancement business which is executed in credit derivative form;
(19)�operational risks, including with respect to internal
processes, risk models, systems and employees; (20)�the risk of
decline in market position; (21)�the risk that market risks impact
assets in our investment portfolio; (22)�the risk of credit and
liquidity risk due to unscheduled and unanticipated withdrawals on
investment agreements; (23)�changes in prepayment speeds on insured
asset-backed securities; (24) factors that may influence the amount
of installment premiums paid to Ambac; (25)�the risk that we may be
required to raise additional capital, which could have a dilutive
effect on our outstanding equity capital and/or future earnings;
(26)�our ability or inability to raise additional capital,
including the risks that regulatory or other approvals for any plan
to raise capital are not obtained, or that various conditions to
such a plan, either imposed by third parties or imposed by Ambac or
its Board of Directors, are not satisfied and thus potentially
necessary capital raising transactions do not occur, or the risk
that for other reasons the Company cannot accomplish any
potentially necessary capital raising transactions; (27)�the risk
that Ambac�s holding company structure and certain regulatory and
other constraints, including adverse business performance, affect
Ambac�s ability to pay dividends and make other payments; (28)�the
risk of litigation and regulatory inquiries or investigations, and
the risk of adverse outcomes in connection therewith, which could
have a material adverse effect on our business, operations,
financial position, profitability or cash flows; (29)�changes in
expectations regarding future realization of gross deferred tax
assets; (30) other factors described in the Risk Factors section in
Part I, 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 and in Part II, Item 1A of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008, and also
disclosed from time to time by Ambac in its subsequent reports on
Form 10-Q and Form 8-K, which are or will be available on the Ambac
website at www.ambac.com and at the SEC�s website, www.sec.gov; and
(31)�other risks and uncertainties that have not been identified at
this time. Readers are cautioned that forward-looking statements
speak only as of the date they are made and that Ambac does not
undertake to update forward-looking statements to reflect
circumstances or events that arise after the date the statements
are made. You are therefore advised to consult any further
disclosures we make on related subjects in Ambac�s reports to the
SEC. Ambac Financial Group, Inc., headquartered in New York City,
is a holding company whose affiliates provide financial guarantees
and financial services to clients in both the public and private
sectors around the world. Ambac's principal operating subsidiary,
Ambac Assurance Corporation, a guarantor of public finance and
structured finance obligations, has earned a Aa3 rating from
Moody's Investors Service, Inc. and a AA rating from Standard &
Poor's Ratings Services; Moody�s rating is on negative outlook
while Standard & Poor's maintains a credit watch negative.
Ambac Financial Group, Inc. common stock is listed on the New York
Stock Exchange (ticker symbol ABK).
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