Standard & Poor’s late Wednesday raised the counterparty credit rating of Ambac Assurance Corp. to 'CC' from 'SD', selective default. The agency also affirmed Ambac’s financial strength rating of 'CC' and changed its outlook on the guarantor to developing from negative.

“The developing outlook reflects our view that Ambac’s financial position has improved, but that the potential for regulatory intervention remains high,” S&P’s analysts said in the research update.

Shares in parent company Ambac Financial Group climbed 9.9%, or 8 cents, to $0.89 cents per share yesterday. Before the credit crisis began, the company’s stock traded as high as $96.08 per share.

The rating upgrade follows Ambac Financial’s 8K filing on Nov. 18, which unexpectedly reported a surplus of $856 million at the end of the third quarter. The filing also said the company had commuted, for about ten cents on the dollar, some $5 billion of CDOs.

“Following the commutations and settlement payment, Ambac’s financial position improved modestly,” the S&P’s report said. The rating agency also took into account the $440 million tax-relief payment that the parent company expects to receive in the current quarter as part of legislation signed by President Obama on Nov. 6.

Ambac Financial’s “ability to meet its debt obligations in the next two years ... is questionable,” S&P said. Indeed, the company’s 10Q filing on Nov. 10 said its liquidity could dry up by the first quarter of 2011, which would force Ambac to seek bankruptcy protection.

S&P’s commented that while the Wisconsin Insurance Commissioner’s Office “has not taken control of Ambac . . .[a] bankruptcy filing of Ambac Financial would create uncertainty for Ambac in terms of ownership, governance, and the possible intervention by the Wisconsin OCI.”

Going forward, S&P said if “additional adverse loss development in its insured portfolio” weakens the company’s surplus to the point of regulatory intervention, the rating will be lowered. If the company continues to commute risky holdings its rating could be upgraded to 'CCC'.

Ambac Assurance has not insured any new municipal debt since June 2008, but it was the third-busiest municipal bond insurer in the primary market for the period between January 2000 and Nov. 30, according to data from Thomson Reuters. Ambac backed $310.8 billion of debt in that period, garnering a 21.4% market share of the total insured volume of $1.45 trillion.

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