Moody’s downgrades Ambac

Moody's Investors Service has downgraded the insurance financial strength ratings of Ambac Assurance Corporation and Ambac Assurance UK Limited from Baa1 to Ba3 and downgraded its bonds to junk.

Moody’s said: “The downgrade of Ambac's ratings primarily reflects weakened risk adjusted capitalisation, as Moody's loss estimates on RMBS securities have increased significantly (particularly with respect to Alt-A transactions). These higher loss estimates increase the estimated capital required to support Ambac's sizable direct RMBS portfolio (including securities owned as well as securities guaranteed) and also the insurer's large portfolio of ABS CDO risks. The rating agency noted that the claims-paying resources of Ambac remain above Moody's expected loss estimates for the firm, though this cushion has been significantly eroded, and losses in more severe stress scenarios would exceed available resources.”

It also said that the credit profile of Ambac Assurance's investment portfolio has deteriorated due to the purchase of structured finance assets from the financial services business.

Moody's stated that Ambac's developing outlook reflects the potential for further deterioration in the insured portfolio as asset performance develops over the intermediate (6-18 month) term.

The following ratings have been downgraded, with a developing outlook:

• Ambac Assurance Corporation -- insurance financial strength to Ba3 from Baa1;
• Ambac Assurance UK Limited -- insurance financial strength to Ba3 from Baa1;
• Ambac Financial Group, Inc. -- senior unsecured debt to Caa1 from Ba1, junior subordinated debt to Caa2 from Ba2 and provisional rating on preferred stock to (P)Ca from (P)Ba3.