Ambac shares rally on S&P credit rating upgrade

AP News
Posted: Dec 03, 2009 1:22 PM

Shares of Ambac Financial Group Inc. rose sharply in heavy trading Thursday after the beleaguered bond insurer's credit rating was upgraded by Standard & Poor's Ratings Services.

The stock, which traded over $95 a share just two years ago, added 11 cents, or 13.8 percent, to 92 cents in afternoon trading. Trading volume was over 18 percent higher than average daily volume.

S&P said the late Wednesday upgrade of Ambac's counterparty credit rating to "CC" from "SD" or selective default, was based on its view that the company's financial position has improved.

But analyst David Veno warned there is still a good possibility for regulatory intervention.

S&P also affirmed its "CC" financial strength rating on Ambac and removed it from CreditWatch, where it was placed last month.

The outlook on the ratings is developing.

Veno said Ambac's financial position gained strength after it paid off its coverage of four risky securities for about $520 million, a fraction of their potential $5 billion value. Removing the investment vehicles _ the type that fueled much of the financial meltdown _ from its books removes the associated risk for a much larger payout.

Bond insurers have been making such moves to reduce the amount of potential risk they are carrying on their books.

Recent legislation also plays into Ambac's favor, Veno said, because it stands to receive about $440 in tax refunds under new laws.

The analyst also took into account increased monitoring of Ambac by the Wisconsin's Office of the Commissioner of Insurance. The agency has not taken control of the insurer, he noted, but said the state's advisers are working with Ambac to evaluate strategic alternatives.

Veno said S&P will lower its rating again if Ambac experiences developments in its insured portfolio that weaken its financial position. If it finds a way to pay down further risky holdings, it could see another upgrade.