NEW YORK (
) -- The extreme volatility in shares of
Ambac Financial Group
Tuesday prompted JPMorgan analyst Andrew Wessel to reiterate his stance that the stock has no value, although he did add a slight disclaimer to his bearish view.
Wessel rates Ambac at underweight and as stated in his note to clients, he has "for some time" asserted that the company's equity is worthless. But he did caution against taking a short position at this time because of the wild gyrations in the stock since it reported its fourth-quarter results last week.
"We believe any investment in ABK shares at this time would be highly speculative, although we still believe a short in ABK equity will generate attractive long-term returns," he writes. "Basically we feel the near-term volatility may not be worth the eventual long-term pay-off from a short."
An Ambac spokesperson wasn't immediately available for comment.
Ambac shares closed at a session-low of $1.62, down 28%, on Tuesday but it ranged as high as $3.39 earlier in the day. Volume reached an incredible 717 million, well beyond the issue's trailing three-month daily average churn of 21.1 million. Since reporting a fourth-quarter profit of $558.1 million, or $1.93 a share, on April 8, largely because of a $472 million tax benefit, the stock had jumped 250% to $2.25 from 64 cents through Monday's closing bell. A
may be a contributing factor to the run-up as NYSE data on short interest showed the stock was one of the 25 most-shorted issues on the Big Board as of March 15.
Ambac has been in run-off mode since the credit bubble burst as its main Ambac Assurance financial guaranty insurance unit hasn't written a significant amount of business since November 2007, according to the company's SEC filings, including no new business in 2009. The company also made a point in its 10-K last week of once again mentioned the possibility of pursuing a prepackaged bankruptcy plan, a possibility it first
in the 10-Q for the third quarter it filed in November.
In his note to clients, Wessel said Ambac's fourth-quarter profit and subsequent disclosures in the company's 10-K filing hadn't changed his opinion on the value of Ambac equity. Of particular note for Wessel was the company's admission in its 10-K that its operating company -- the public parent that receives dividends from the insurance business -- could decide to stop paying interest on its debt prior to the third quarter of this year.
"This would cause a default on the HoldCo debt, and thus likely lead to a complete loss for all shareholders," Wessel writes, adding later that an event of default "cause all of its insured contracts in CDS
credit default swap form to call for accelerated payment," and create "the equivalent of a bank run on the remaining capital" in the operating company.
Wessel also believes the plan of the Wisconsin insurance regulator that serves as Ambac's main regulatory authority to split the company's municipal and structured finance policies into separate accounts will be "materially dilutive" to equity holders as it will require Ambac's operating company to issue a $2 billion negatively amortizing secured note as well as an undetermined amount of additional surplus notes; all of which would be senior to equity in the company's capital structure.
Without dividends from its units, Wessel estimates the holding company would likely default on its debt in the third quarter of 2011.
Written by Michael Baron in New York