August 13, 2009 / 8:18 PM / 10 years ago

US CREDIT-Ambac, MBIA liquidity at risk without new business

 By Karen Brettell
 NEW YORK, Aug 13 (Reuters) - Ambac Financial Group ABK.N and MBIA Inc (MBI.N) risk a liquidity crunch in coming years as continuing losses at their bond insurance arms deplete capital and plans to write new business remain on hold.
 Bond insurers have been decimated by losses from selling hundreds of billions of dollars of protection on debt that included large exposures to deals packed with risky mortgage-backed securities.
 Attempts to launch new municipal bond insurance operations have also run into snags. Ambac in June delayed plans to launch a new insurance arm after struggling to raise capital for the unit, called Everspan.
 MBIA plans to write new business through a unit called National Public Financial Guarantee Corp, but it is facing litigation from a group of banks that is delaying this effort.
 The banks allege the transfer of assets to the new company leaves fewer resources to pay claims in its bond insurance arm.
 MBIA spokesman Kevin Brown said the company’s goal remains to write new business from National.
 Unless they are able to write new business, dividends to the holding companies will be restricted, and eventually will run through their available liquidity.
 “Ambac would only have enough liquidity through the second quarter of 2011 barring any external sources of funds,” JPMorgan credit analysts said Arun Kumar and Brett Gibson said this week in a report.
 Analysts at Barclays Capital agree.
 Efforts to tear up exposures, “will be overwhelmed by further incurred losses and statutory surplus will turn negative in coming quarters,” analysts Brian Monteleone, Thomas Walsh and Ming Zhang said in a report.
 Ambac spokesmen Peter Poillon declined to comment on the reports.
 MBIA also faces a potential cash crunch in 2011, though the company may face fewer restrictions in being able to upstream dividends to its parent unit, said JPMorgan.
 “We estimate that without dividends from the operating company or any other type of external capital infusion, MBIA will have enough holding company cash to make it through the fourth quarter of 2011 (absent any claim from the asset management division),” the bank said.
 However, “we note that relative to Ambac, the dividend restrictions from the operating company are more relaxed in New York and that MBIA has the option of getting dividends from either MBIA Insurance Corp or National, making us more comfortable that they will be able to upstream dividends in the next few years,” they said.
 MBIA is based in New York while Ambac is based in Milwaukee, Wisconsin.
 Credit default swaps on both companies, meanwhile, are reflecting high concerns over their liquidity.
 Ambac Financial’s five-year credit default swaps are trading at around 52 percent upfront, or $5.2 million to insure $10 million in debt, plus annual payments of $500,000, according to Markit Intraday.
 MBIA credit default swaps are trading at around 30 percent upfront, Markit data show.
 Ambac and MBIA have been terminating contracts with counterparties in an effort to reduce exposures to risky assets. Ambac said last week it paid around $750 million to reduce its exposure to risky debt by $2.8 billion.
 Both companies have also filed suits against some counterparties to tear up contracts, arguing that the risks of the deals were misrepresented. For details, see [ID:nN07402014].  (Editing by James Dalgleish)                

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