Ambac Equity Raising Only 60% of Earlier Target

Today’s announcement by Ambac, that it will raise $1.5 billion in equity and equity units, came as a shocker. It had been leaked more than a week ago that the bond insurer planned to raise a total of $3 billion, $2.5 billion of it in equity backstopped by the eight banks previously involved in bailout talks, and $500 million in debt. Now the deal is only $1.5 billion in equity, no mention of debt, and apparently no bank backstop either.

If the banks couldn’t were unwilling to offer even a mere backstop, it suggests that Ambac wasn’t able to provide satisfactory information about its prospects, confirming the critics’ case.

The fact that the equity-raising is so far below the earlier plan is a bad sign for Ambac’s ability to maintain its AAA. This is at most a short-term stay of execution unless the housing market miraculously improves. Needless to say, the share price beat a hasty retreat.

From Bloomberg:

Ambac Financial Group Inc., the bond insurer facing a crippling credit-rating downgrade, plans to sell $1.5 billion of common stock and equity units to bolster its capital.

Ambac dropped as much as 20 percent in New York Stock Exchange composite trading on concern the offering may not be enough to keep the company’s AAA rating. Investors anticipated the company would raise as much as $3 billion, said Robert Haines, an analyst at CreditSights Inc.

“It’s too little, too late,” said Kevin Giddis, head of fixed-income trading in Memphis, Tennessee, at Morgan Keegan Inc., a brokerage and investment-banking firm. “I think the market expected more substance.”….

The sale will be split into $1 billion of shares and $500 million of units, New York-based Ambac said today in a statement. There’s no indication that banks are backstopping the offering, leaving open the chance the sale may fail, said Haines of CreditSights, an independent bond research firm in New York…..

While S&P said today that Ambac’s offering probably may be enough to retain the top ranking, Ambac and its competitors face so many losses on subprime mortgages that they may not be able to keep their AAA for long, said Peter Plaut, an analyst with hedge fund Sanno Point Capital Management in New York.

“Ambac’s capital raising might save the company’s AAA ratings in the short term, but the outlook for continued writedowns and impairments to capital clearly indicates that this is not a AAA industry,” Plaut said.

Moody’s on Feb. 29 said it would probably affirm Ambac’s Aaa rating if its “capital strengthening activities” are successful. The New York-based ratings company said it was continuing its six-week review pending an agreement…

Credit-default swaps tied to Ambac’s bond insurer rose 10 basis points after the announcement to 530 basis points, according to CMA Datavision in London.