Updated from 10:44 a.m. EST
Fitch Ratings levied more bad news on the financial guarantor
(ABK) on Friday, cutting its critical triple-A rating.
The rating agency slashed the premium triple-A rating to double-A for Ambac Assurance Corp., Ambac Assurance UK Ltd. and Connie Lee Insurance Co. and cut holding company Ambac Financial Group from double-A to single-A.
The ratings action comes after Ambac said it was abandoning plans, unveiled just Wednesday, to raise $1 billion. On Thursday, Moody's Investor's Service also threatened to cut the troubled bond insurer's rating as well, sending its stock plummeting along with that of larger peer insurer
(MBI - Get Report).
Ratings are critical for bond insurers such as MBIA and Ambac, who must use their high credit rating to underwrite insurance contracts and backstop losses on debt from municipal bonds to more complicated structures such as collateralized debt obligations and mortgage-related securities. Bond insurers as a group insure some $2.5 trillion in debt that is held by pensions, insurance companies and big banks, including
(C - Get Report)
The real jeopardy about ratings cuts in the monoline bond insurance sector is the
implications for big banks
and counterparties that hold contracts insured by Ambac and MBIA. Bill Gross, CEO of bond shop Pacific Investment Management Co., has speculated that losses tied to bond insurers and the firm's they hold insurance for could be an otherworldly $250 billion.
Ambac's stock has been leveled over the past several days as news of further writedowns in its debt portfolio have come to light. The stock was
down nearly 52%
on Thursday, but saw investors take a more positive tone when the insurer decided to nix the plan to raise $1 billion in new capital in favor of underwriting no new business and collecting payments from its existing pool of contracts. Shareholders had groused that the planned capital raising efforts -- a move to kowtow to the fickle rating agencies -- would dilute Ambac's outstanding equity.
Ambac's shares were up for the better part of Friday by as much as 8.2% on the news of its plan. After Fitch's downgrade, it was still up around 9.3% at $13.62. MBIA shares recently were down around 7.8% to $8.50 on Friday, after shedding 31% on Thursday.
A spokesman for MBIA declined to comment on the ratings moves, including an announcement earlier by Moody's that would revisit a review of MBIA's balance sheet even after affirming the insurer's rating a month ago. A call to an Ambac official was not immediately returned.
Fitch Ratings late last year warned Ambac and MBIA that if the insurers didn't raise $1 billion by late January, they would be downgraded. The ratings agencies have been accused of being late to respond to the mortgage debacle that has been at the root of the entire financial calamity.
Ratings firms have also seemed to flip flop between endorsing the lofty ratings of these insurance shops and then reversing course, even after conducting months of due diligence on their balance sheets.
The wild ratings process suggests that either these bond insurers are being less than forthcoming with the rating firms, the securities and underwriting methods are too hard to parse, the rating agencies are somehow inept -- or all of the above.
What's equally concerning is the jousting taking place between the ratings agencies and the bond insurers.
Ambac, in a terse statement Friday in which it announced it was abandoning the plans to raise capital, said "it remains confident in its insured portfolio and will communicate further on these matters in its previously scheduled conference call on Tuesday, Jan. 22."
Earlier this week, Ambac said it would
slash its dividend and raise $1 billion
in an effort to maintain its triple-A rating. On Friday, it said market risk and "recent actions of certain ratings agencies" -- an overt reference to Moody's -- changed those plans. The company continues to evaluate its alternatives, it said.