Ambac Reverses Course, Decides Not to Split

According to the Financial Times, number two bond insurer Ambac has decided not to split its operations into a muni insurance business and a structured finance business.

Note that we said on February 19 that we didn’t see how Ambac could possibly raise the $3 billion it sought ($2.5 billion in equity and $500 million in debt) with a split in the offing. And recall, that $3 billion fundraising is imperative for it to maintain its fiction of an AAA rating:

Remember, Ambac was trying, like all the other bond guarantors, to raise money before Spitzer delivered his ultimatum. That went nowhere. But we are now back to Plan A, except with the break up idea added. But does that make investing any more attractive?

The answer is no. Before, you had a situation that was either going to end badly, if you believed Bill Ackman and the shorts, or was misunderstood and therefore perhaps a buy, if you believed the insurers. (Aside: my sense is no one has lifted the kimono enough for anyone to get a reading as to the exposures, which does not encourage investors). In other words, you had a high degree of uncertainty (how bad will the mortgage business get? How much capital might be needed over time to keep an AAA rating?), but it could be analyzed.

Now, Ambac is seeking to raise money. It hopes to split up, but gee, we aren’t certain we can do that, and even if we can, we aren’t exactly sure yet how this will work.

Is any one with any sense going to invest in a proposition like that? You have absolutely no idea what you are getting into. This whole discussion of a breakup plan has increased uncertainty enormously and raised the specter of litigation risk. Those are not exactly comforting to investors.

It appears the company has come to the same conclusion. Of course, being domiciled in Wisconsin, they are not regulated by Eric Dinallo, who is set on the breakup idea. Ambac thus may also have been able to talk sense into their keeper.

From the Financial Times:

Ambac, the troubled bond insurer, has decided against splitting in two as it completes a $2bn-$3bn recapitalisation, insiders said.

Under a recent proposal, Ambac, the second biggest bond insurer, or monoline, would have split its operations into a triple-A-rated municipal bond insurance business and a structured finance business with potentially lower ratings. A lower rating on the structured part of its business could have forced banks to reduce the value of guarantees on collateralised debt obligations and on derivative trades.

There was also the possibility of lawsuits by banks and other groups that bought insurance on CDOs and other structured products. Eight banks, led by Citigroup and UBS, which between them bought the most guarantees from Ambac, are together preparing to inject $2bn or more into the monoline, which has been racing to come up with fresh capital to avoid a sharp cut in its triple-A rating.

The capital infusion, which is likely to include other investors beside the banks, could be announced as early as Wednesday, people involved in the talks said. The deal is expected to result in Ambac remaining a single entity with a triple-A rating.

Although Ambac’s past guarantees are expected to remain together, its future business is likely to be different. Ambac announced late last week that it had slashed dividends and would stop providing insurance on structured finance deals for at least six months.