Ambac, Assured Guaranty Strike $29 Billion Reinsurance Deal

The monoline bond insurer Ambac Financial Group (ABK) announced late Thursday that a unit of Assured Guaranty (AGO) will reinsure $29 billion worth of its financial guaranty contracts, improving Ambac's capital position and easing the immediate threat of a rating downgrade. In exchange, Ambac will give the Assured Guaranty unit, AG Re, more reinsurance business over the next three years. The WSJ notes that Assured Guaranty has "the least exposure to subprime-mortgage-related loans in the form of collateralized debt obligations" of all financial guarantors, and its own AAA rating is not in question. On Wednesday, Fitch said it will cut its rating on Security Capital Assurance (SCA) to AA if it fails to come up with $2 billion in capital over the next four to six weeks (full story).

"It is clear that these entities now have every incentive to keep their rating," said Greg Peters, head of credit strategy at Morgan Stanley. "Today they have begrudgingly moved from the denial stage into the recognition and partial acceptance phase... Two weeks ago, they were... outwardly complaining that the markets didn't understand their business." Billionaire investor Wilbur Ross is considering investing in distressed monolines. "They all need capital," he said. "It seems that if you can find one make it through without losing its triple-A rating, that could be a very good investment." Ambac shares closed down 4% at $23.84 prior to the announcement.

Sources: Press release, Wall Street Journal, Reuters I, II
Additional Reading: Pershing's Ackman: MBIA and Ambac Could Be Belly-Up By Q2 2008

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.