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Shares of bond insurer Ambac Financial Group Inc. (NYSE: ABK) have been plunging in early morning trading after the company announced it would cut its dividend by 67% to 7 cents a share from 21 cents. Ambac also revealed its plans to raise capital by issuing at least $1 billion of equity and securities. The move is designed to maintain its "AAA" financial strength rating.
The second-largest bond insurer said it would replace its chief executive Robert Genader with board member Michael Callen, who will become chairman and interim CEO. The company cited its dissatisfaction with Genader's management, which brought the first-ever loss for the company last quarter.
The bond insurer's concerns came after Fitch Ratings warned it would cut its rating on Ambac if it was unable to increase its capital by at least $1 billion to cover potential future losses. Higher delinquencies and defaults among mortgages over the past few months increased ratings agencies' concerns over a possible surge in bond insurance claims.
As a result, Ambac is thinking about selling shares and convertible stock to get its capital infusion to avoid losing its AAA rating. "The clock is ticking" for the company and its AAA debt rating is vital. Its loss could jeopardize ratings on $556 billion of bonds and endanger the company's ability to guarantee new issues.
However, for the moment it seems the company needn't be too concerned, as Callen declared in a statement that Ambac will see the capital raising "within an accelerated time frame.'' The company expects its infusion plans will meet Fitch Ratings' current triple-A capital requirements.
The bond insurer had to face a pretty difficult 2007 when saw its shares falling 71% on worries that rising defaults on mortgage-linked securities would use up its cash reserves. And the company's problems are far from over, as Ambac warned it expects a loss of up to $32.83 a share for its fourth-quarter.
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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