Breaking Down Ambac’s News. 1.5B capital raise cause problems

Mar.05, 2008 in U.S Hot Stocks

Earlier today, Ambac Financial Group, Inc. (NYSE: ABK - News) announced it would sell at least $1.5 billion in stock and convertible securities to help boost capital levels at its main insurance unit, which has been facing potential ratings downgrades. While this move should help to retain its current credit rating presently, it is abundantly clearly the market was not pleased.

Ø By selling $1.0 billion in new share (using $10 per share, ABK would substantially dilute its shares outstanding — basically a doubling).

Ø Considering that we are at the beginning of mortgage meltdown versus the trough, we view the $1.5 billion in additional capital as more of a ‘Band-aid effect’ to the problem.

Ø ABK is also attempting to shore up its capital base by suspending new business in the riskiest segment of the market. While capital may improve from this action over time, earnings will be hampered over the near-term.

We rate the share of ABK a Sell. Our six-month target price is currently $7.65.

By Zacks.com

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