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Ambac Financial Group Inc. (ABK) – Bonding Out

Major bond insurer Ambac Financial Group Inc. (ABK) has lost money for three straight quarters and may be forced to raise more capital. Its stock is down 43% and the $1.66 billion loss raises questions about its “AAA” credit rating. If trends like this continue, it is going to have to go back to the markets very soon.

The company’s net worth is dwindling as it is forced to write down bad assets linked to sub-prime mortgages. It is important to look at the net worth of a company like Ambac because a low net worth will cause difficulties in raising capital. Ambac’s net worth is now below the minimum requirement for maintaining a $400 million credit line.

The issue of Ambac’s net worth is important; both because it has already dipped below the minimum net worth required to maintain a $400 million credit line, and because too low a net worth will make it harder to raise additional capital. Ambac’s management says the bond insurer does not need to raise new capital and its latest analysis of expected payouts and receipt of insurance premiums indicates it will generate enough taxable income to enjoy the benefit of the deferred tax asset.

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