Wednesday after the bell, bond insurer Ambac Financial Group Inc. (ABK) announced that it has commuted two CDO-squared exposures and two high-grade CDO of ABS exposures, having a total notional value of $3.5 billion as at September 30, 2008, in exchange for a cash payment of $1.0 billion paid by Ambac Assurance Corporation, or AAC, the principal operating subsidiary of Ambac Financial Corporation, that acts as a guarantor of public finance and structured finance obligations.
The New York-based company stated that the two CDO-squared exposures, or CDO of CDO of ABS, originally comprised collateral consisting of A-rated CDO of ABS tranches. The two high-grade CDO of ABS exposures originally comprised collateral consisting of asset-backed securitization that are rated A- or higher. Ambac further noted that all the four transactions had been internally downgraded to below investment grade.
Following the settlement of these transactions, the bond insurer expects to record positive adjustments to its aggregate mark-to-market and impairment reserves. Also, the stress case losses for these transactions exceeded the final payment made by AAC, thus resulting in improved rating agency capital position for AAC.
Commenting on the transactions, the chief executive officer of Ambac, David Wallis said, "My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction. Ambac has consistently emphasizes that in this period of extreme uncertainty in the capital markets, the de-risking and de-leveraging of our balance sheet is our highest priority. These settlements represent positive and tangible steps towards that goal. We have now successfully commuted five CDO transactions representing $4.9 billion of notional exposure including three of the CDO-squared transactions that had been widely perceived to be the riskiest segment of our CDO portfolio."
The stock price of Ambac Financial Corporation closed the regular trading session on Wednesday at $0.76, down 33.33% or $0.38, on a volume of 22.4 million shares. In the after-hours trading, the stock gained more than 51% or 39 cents and is quoted at $1.15.
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