Is It Time to Buy Ambac?

Recent events may say that Ambac (ABK) has bottomed.

1- Ackman:
According to his recent SEC filing, Pershing's Bill Ackman no longer holds a short position in the company. The most vocal critic of the bond insurers, Ackman's actions show that he feels the downside from here is limited. It is also of note that he dramatically scaled back his short exposure to MBIA (MBI) since December.

2- Whitman:
Value investor Martin Whitman has picked up over 10 million shares of the bond insurer. Whitman, whose Third Avenue Value has trounced the markets since its inception, is famous for his bets in troubled companies.

3- Exposure:
Ambac recently responded to a Moody's rating inquiry:

[W]e have already taken substantial reserves against our CES and HELOC portfolios (48% and 33%, respectively, against below investment grade exposure). Moreover, we have not assumed any recoveries related to our active remediation efforts. Despite very stressful loss estimates of our portfolio, we believe we have already exceeded Moody's stressed AAA target as of April 30th, 2008 and we continue to build excess capital.

Ambac has no material exposure to subprime borrowers in either asset class. The estimated range of average FICO scores for borrowers within pools we've insured in these asset classes is 695 - 745.

The big news is the Ackman exit. Without his negative commentary (and the specter of his presence) on the insurers, sentiment will begin to turn and the value investors that have bought shares and their outlook will begin to take a dominant role.

It has become clear that the NY Insurance Commissioners Office has decided that these two, MBIA and Ambac will not fail. They have held off ratings downgrades and the public statements from the office are always an attempt to reassure investors. Let's also not forget that a failure of either of these will not exactly put the Office in the best of light. Without pal Eliot Spitzer to look out for him, Commissioner Dinallo may be in danger of being able to "pursue other opportunities".

That being said, the downward heat on both companies just subsided big time. With smart money pouring into Ambac, I think it may be time to take a small stake.

Disclosure: No position

Comments

[fxtrader07:]

good observations.
the questio one should ask here is: if ackman exits the short here - how serious and crdible was his presentation on abk and mbi in the first place? because if he evenr believed in it, there was zero need to bail.
it seems, he did a great job in talking his book - even though he was never even remotely close to the truth in his assumptions and estimates

2008 May 18 10:07 AM

[Oleg M:]

The fact that he has exited his short positions does not necessary indicate he's no longer bearish on ABK, MBI. I think it is very likely that he has identified better opportunities, and hence reallocated his capital elsewhere.

Regardless what you think of Mr. Ackman, it is foolish to judge companies solemnly based on opinion of one person. You may not know all his motives.

Where was that article that SP thinks that HELOCs rated below AA will have 0 recovery rate in super senior tranches (IIRC)

2008 May 19 01:16 AM

[discov:]

Yeah, if it actually is a value, then go ahead and show us the numbers...you know the balance sheets and all those numbers that tell us if a company is worth something or not. I don't follow names into stuff. Plenty of "smart money" guys have gotten eaten in the last year.

Ryan

2008 May 19 02:22 AM

[themicrokid:]

Balance sheets, those are the things S&P used to rate ABK, BSC, DRL, etal, aren't they.

Screwed by proforma, screwed by GAAP, screwed by the rating companies.

2008 May 19 07:42 AM

[robert142:]

Stay away from ABK this stock stinks,the only movement this stock is doing is downward,it cannot get an up day because its aways getting beat down,you may have a better chance with MBI.

2008 May 19 04:39 PM

[MajorG:]

You've gotta be kidding me with buying Ambac. Of course Ackman is gone. Ambac is under 4 bucks, so from a risk/reward standpoint how much more could Ackman gain?? Next to nothing. He milked that cow and now he's gone.

The world is littered with the corpses of value players getting caught in "value traps". Ask Bill Miller how good that feels.

I also disagree that sentiment will turn. With the news that some states are now saying municipalities are no longer required to carry insurance....look out below. How long before others follow and in other sectors?

This is a dead business unless your name is Warren Buffett.

2008 May 19 10:47 PM

[Ishortyou:]

munies never needed bond insurers the only reason they have them its to improve their ratings and pay lets inrerest on their bonds, but now they are allow to sell junk bonds and pay more interest on this iowu notes.

2008 May 21 10:25 AM