Ambac may not be able to avoid downgrade

NEW YORK (AP) -- A potential $3 billion in new capital still might not be enough to keep Ambac Financial Group Inc. from being downgraded, a Bank of America Securities analyst said Monday.
"In our view, there is still a meaningful risk of downgrades for Ambac," analyst Tamara Kravec wrote in a research note. "Moreover, the question would remain: is $3 billion enough?"
Ambac (ABK) could reach an agreement as early as Monday with a group of banks to provide capital to help the beleaguered bond insurer, The Wall Street Journal reported.
The Wall Street Journal said Ambac could raise about $3 billion as it looks to bolster its capital reserves to cover any potential spike in claims, as a portion of the bond insurance market is expected to sour.
Banks providing funding for the new capital raise could include Citigroup Inc. (C, Fortune 500), UBS AG (UBS), Wachovia Corp. (WB, Fortune 500) and Royal Bank of Scotland Group PLC, (RBS) the paper said.
Bond insurers pay out claims when issuers fail to make payments. Ratings agencies have worried in recent months that a sharp rise in defaults among mortgages could spark a wave of defaults among bonds backed by the troubled loans - bonds insured by companies like Ambac. That rise in claims could become unmanageable for the insurers and has forced them to look for outside sources to raise cash to cover potential future defaults.
Fitch Ratings already downgraded Ambac from its crucial "AAA" financial strength rating. Moody's Investors Service said it would complete reviews of ratings on bond insurers by the end of the month.
Bond insurers essentially need a "AAA" rating to book new business.
Even if the capital is enough for Ambac to maintain its "AAA" ratings from Moody's and Standard & Poor's, it will be dilutive to shareholders.
"An equity capital raise of $2.5 billion would be about 20% to 25% dilutive to book value," Kravec wrote in the note.
Kravec maintains a "Neutral" rating on Ambac with a price target of $7.
Shares of Ambac rose 38 cents, or 3.6 percent to $11.09 in premarket trading.