The ABS market reacted to Ambac Financial Group's $1.5 billion common stock and equity offering last week with disappointment.
The bank consortium bailout that market participants had been expecting fell short, sources said. It certainly did not remove any of the uncertainty about the bond insurer's mortgage exposure, neither did it provide any comfort as to the soundness of the guarantor's business model.
"The market obviously was looking for some sort of rescue plan that would be able to help quantify what the downside risk at Ambac is and obviously we did not get that," said Mark Lane, analyst at William Blair.
The deal, which is a $1 billion offering of common shares and $500 million of equity units, did not resemble the $3 billion bank bailout plan that had been talked about around the market.
Furthermore, the banks underwriting the deal did not agree to backstop the offering, which is a good indication of the extent of Ambac's potential losses, many market participants said.
In the prospectus released last Wednesday, Ambac said that some of the banks underwriting the deal forecast losses that exceed what Standard & Poor's most recent stress test indicates "and, in some cases, materially exceed the sum of the mark-to-market losses [Ambac has] reported plus the amount of [Ambac's] loss reserve estimates." Under its most current stress test, S&P estimates that the present value of cumulative losses could exceed more than $4 billion on an after-tax basis, according to CreditSights, which would mean the offering would not be enough to keep the guarantor well capitalized.
"For [Ambac] to remain a viable company, they will either have to go back to the markets again or have it turn out that over the next six months to a year losses are on the lower end of estimates," said Rob Haines, analyst with CreditSights.
While the guarantor said that it would hold off on writing structured finance business for the next six months in order to raise additional capital, there has not been much of a market to write new deals, especially on the municipal side, market participants said, which continues to remain exposed to structured finance losses.
"[Ambac] is not close to insolvent by any means; [the company] still has a triple-A rating - from Moody's Investors Service and S&P - but all that does is help the banks out because they do not have to write down their counterparty exposure," Haines said. Fitch Ratings kept the AA' rating on negative watch.
A positive aspect of Ambac's putting the structured finance business on hold and announcing that it will discontinue certain structured finance businesses altogether is that the plans will streamline the company's business model.
Among businesses the company will stop investing in are CDOs, CLOs and other arbitrage-driven transactions; all mortgage-backed securities; auto loan and lease securitizations; credit card receivables and emerging market transactions.
"[Ambac is] trying to bring to the market a more simple business plan to regain confidence in the integrity of the business model," Lane said. Calls to an Ambac spokesman were referred to Credit Suisse and Citigroup, two of the underwriters on the deal. Neither bank returned calls for comment.
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