Investors Wait on Word of Ambac Rescue

Ambac FinancialABK shares were edging higher early Monday, as investors await word of a reportedly imminent bailout deal from a consortium of banks.

Big money-center banks that have the greatest exposure to Ambac are said to be ponying up between $2 billion to $3 billion in a plan that would see it break itself into two halves, sources tell TheStreet.com. One would house policies for conservative debt including municipal bonds, and another would backstop losses on structured debt, which is dropping in value due to the slumping mortgage market.

In a note Monday, Banc of America Securities analyst Tamara Kravec said that still might not be enough to stave off ratings downgrades, according to the Associated Press. A hit to the bond insurer's largely pristine rating -- already downgraded to double-A by Fitch Ratings -- could debilitate Ambac's ability to win new business.

"In our view, there is still a meaningful risk of downgrades for Ambac," Kravec wrote in the note. "Moreover, the question would remain: is $3 billion enough?"

Late Friday, CNBC first reported that a bank consortium that has been hashing over a bailout of Ambac over the past several weeks had begun to make "significant progress" that could see a plan come to fruition by as early as Monday. The television report sent stocks soaring to the close.

Such an Ambac breakup would likely bolster the staid muni bond exposures and help it retain its triple-A rating, while providing a backstop in the form of the capital infusion from the money-center banks that include CitigroupC, Wachovia BankWB, Barclays CapitalBCS, UBSUBS, Royal Bank of Scotland, BNP Paribas and Société Générale.

A call to an Ambac spokeswoman in New York was not returned. Officials at the banks either declined to comment or did not return calls.

Ambac shares recently were up 2% to $10.92.

Specifics on the plan could not be learned. But one source tells TheStreet.com that discussions between the banks and the guarantor have been centered on trying to arrange a structure that bolsters the company's capital sufficiently to achieve a triple-A rating. Rating agencies, while not intimately involved in the process, have been privy to the planned structure so as to offer ratings guidance, the source says. While progress has been achieved, the rescue could still collapse, the person adds.

Fashioning a bailout for the monoline bond insurers, which of late have been at the heart of concern for Wall Street, has been a complicated matter. It could result in the firms taking warrants that convert into stock in exchange for offering up capital. Talk of a possible line of credit also has been circulating, but that could be a more delicate matter because the rates the banks might request may fly in the face of Ambac's current double-A rating.

"If these banks are pretending these companies are triple-A, it's really all a sham," said Edward Grebeck, CEO of Tempus Advisors in Stamford, Conn. "This [rescue] resembles two drunks standing on a corner trying to hold each other up, frankly." The executive notes that capital-constrained firms Citi, Wachovia, UBS and SocGen have all written down billions in soured debt.

New York Insurance Superintendent Eric Dinallo has been scrambling to orchestrate a viable rescue plan. The superintendent has been aggressively mediating between banks, brokers and rating firms and is perhaps part of the reason a plan for Ambac has come together. The official must give the blessing for a breakup of insurers into a "good insurer/bad insurer" model. A bailout plan for closely-held guarantor Financial Guaranty Insurance Co. also was floated earlier in the month, but the progress of that arrangement could not be learned.