Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today responded
to Moody’s May 13, 2008 announcement about the
poor performance of certain second lien RMBS and its impact on financial
guarantor ratings. In that announcement and in a Special Report titled “U.S.
Subprime Second Lien RMBS Rating Actions Update”
dated May 12, 2008, Moody’s discussed its
rating actions to date related to subprime second lien residential
mortgage-backed securities issued between 2005 and 2007. Additionally,
it discussed subprime second lien loan performance to date and its
cumulative loss projections for the asset class within those vintages.
In response to the reports, Ambac states the following (all amounts as
of March 31, 2008):
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As reported on its web site, Ambac has closed end second lien (“CES”)
exposure amounting to approximately $0.1 billion, $3.5 billion and
$1.0 billion in vintage years 2005, 2006 and 2007, respectively.
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Ambac has home equity line of credit (“HELOC”)
exposure amounting to approximately $2.0 billion, $2.7 billion and
$4.1 billion in vintage years 2005, 2006 and 2007, respectively
(similarly reported on its web site).
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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.
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Ambac analyzes these portfolios on a transaction by transaction basis
using the most recent actual performance data and projecting future
performance using “roll rate”
analysis.
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Within the CES portfolio, Ambac has downgraded seven transactions
(amounting to $2.1 billion) to below investment grade. The seven
transactions are represented by three issuers, all were originated in
2005 to 2007 and all have reserves estimated. While Ambac has not paid
claims on any of its CES transactions to date, we have established
reserves based on estimates of cumulative losses over the lives of the
stressed transactions.
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The vast majority of the remaining CES portfolio from this time period
comprises three 2006 Countrywide transactions that are performing
satisfactorily, with cumulative losses to date ranging from 0% to 0.5%.
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Within the HELOC portfolio, Ambac has downgraded seven transactions
amounting to $2.2 billion) to below investment grade. The seven
transactions are represented by five issuers, all were originated in
2005 to 2007 and all have reserves estimated.
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Ambac has observed clear performance differences within these
portfolios, particularly earlier versus later vintages and bank versus
non-bank originators. Moody’s commented in
its Special Report, “Moody’s
expectations on individual transactions can vary significantly around
those numbers (Moody’s expected cumulative
loss estimates by vintage), based on the quarter of origination as
well as deal- and issuer- specific characteristics.”
Ambac fully agrees that performance varies greatly and has
appropriately reserved for its underperforming transactions. The
stress we are experiencing within each of these portfolios is limited
to a relatively few transactions. The remaining transactions in both
asset classes are performing within expectations and are internally
rated investment grade.
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Ambac is in the process of aggressively remediating this portfolio.
Several transactions within these two portfolios are the subject of
diagnostic, forensic and legal scrutiny. We have begun the process of
putting back loans that we believe do not fit the various criteria
represented by the originators. While we believe that these
remediation efforts may have a material impact on the ultimate losses
in these transactions, we have not factored in any potential recovery
into our loss estimates at this time.
In summary, we 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. Maintaining our Aaa Moody’s
rating is an important business objective. As such, we are scheduled to
have detailed discussions with Moody’s to
present an updated drill down analysis on our second lien exposures.
Forward-Looking Statements
This release contains statements that may constitute "forward-looking
statements" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any or all of
management’s forward-looking statements here
or in other publications may turn out to be wrong and are based on Ambac’s
management current belief or opinions. Ambac’s
actual results may vary materially, and there are no guarantees about
the performance of Ambac’s securities. Among
events, risks, uncertainties or factors that could cause actual results
to differ materially are: (1) changes in the economic, credit, foreign
currency or interest rate environment in the United States and abroad;
(2) the level of activity within the national and worldwide credit
markets; (3) competitive conditions and pricing levels; (4) legislative
and regulatory developments; (5) changes in tax laws; (6) changes in our
business plan, including changes resulting from our decision to
discontinue writing new business in the financial services area, to
significantly reduce new underwriting of structured finance business and
to discontinue all new underwritings of structured finance business for
six months; (7) the policies and actions of the United States and other
governments; (8) changes in capital requirements whether resulting from
downgrades in our insured portfolio or changes in rating agencies’
rating criteria or other reasons; (9) changes in Ambac’s
and/or Ambac Assurance’s credit or financial
strength ratings; (10) changes in accounting principles or practices
relating to the financial guarantee industry or that may impact Ambac’s
reported financial results; (11) inadequacy of reserves established for
losses and loss expenses; (12) default by one or more of Ambac Assurance’s portfolio
investments, insured issuers, counterparties or reinsurers; (13) credit
risk throughout our business, including large single exposures to
reinsurers; (14) market spreads and pricing on insured collateralized
debt obligations (“CDOs”)
and other derivative products insured or issued by Ambac; (15) credit
risk related to residential mortgage securities and CDOs; (16) the risk
that holders of debt securities or counterparties on credit default
swaps or other similar agreements seek to declare events of default or
seek judicial relief or bring claims alleging violation or breach of
covenants by Ambac or one of its subsidiaries; (17) the risk that our
underwriting and risk management policies and practices do not
anticipate certain risks and/or the magnitude of potential for loss as a
result of unforeseen risks; (18) the risk of volatility in income and
earnings, including volatility due to the application of fair value
accounting, or FAS 133, to the portion of our credit enhancement
business which is executed in credit derivative form; (19) operational
risks, including with respect to internal processes, risk models,
systems and employees; (20) the risk of decline in market position;
(21) the risk that market risks impact assets in our investment
portfolio; (22) the risk of credit and liquidity risk due to unscheduled
and unanticipated withdrawals on investment agreements; (23) changes in
prepayment speeds on insured asset-backed securities; (24) factors that
may influence the amount of installment premiums paid to Ambac; (25) the
risk that we may be required to raise additional capital, which could
have a dilutive effect on our outstanding equity capital and/or future
earnings; (26) our ability or inability to raise additional capital,
including the risks that regulatory or other approvals for any plan to
raise capital are not obtained, or that various conditions to such a
plan, either imposed by third parties or imposed by Ambac or its Board
of Directors, are not satisfied and thus potentially necessary capital
raising transactions do not occur, or the risk that for other reasons
the Company cannot accomplish any potentially necessary capital raising
transactions, including the transactions contemplated hereby; (27) the
risk that Ambac’s holding company structure
and certain regulatory and other constraints, including adverse business
performance, affect Ambac’s ability to pay
dividends and make other payments; (28) the risk of litigation and
regulatory inquiries or investigations, and the risk of adverse outcomes
in connection therewith, which could have a material adverse effect on
our business, operations, financial position, profitability or cash
flows; (29) other factors described in the Risk Factors section in Part
I, 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007 and in Part II, Item 1A of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, and also disclosed from
time to time by Ambac in its subsequent reports on Form 10-Q and Form
8-K, which are or will be available on the Ambac website at www.ambac.com
and at the SEC’s website, www.sec.gov;
and (30) other risks and uncertainties that have not been identified at
this time. Readers are cautioned that forward-looking statements speak
only as of the date they are made and that Ambac does not undertake to
update forward-looking statements to reflect circumstances or events
that arise after the date the statements are made. You are therefore
advised to consult any further disclosures we make on related subjects
in Ambac’s reports to the SEC.
Ambac Financial Group, Inc., headquartered in New York City, is a
holding company whose affiliates provide financial guarantees and
financial services to clients in both the public and private sectors
around the world. Ambac's principal operating subsidiary, Ambac
Assurance Corporation, a guarantor of public finance and structured
finance obligations, has earned triple-A ratings from Moody's Investors
Service, Inc. and Standard & Poor's Ratings Services; and a double-A
rating from Fitch, Inc. Moody's, Standard & Poor's and Fitch all
maintain a “negative outlook”.
Ambac Financial Group, Inc. common stock is listed on the New York Stock
Exchange (ticker symbol ABK).
