Ambac to settle $3.5B in mortgage debt exposure

Ambac Financial Group Inc. of New York said that it has reached an agreement with its counterparties to terminate $3.5 billion of mortgage debt exposure. The exposure was in four transactions: two collateralized-debt-obligation squared transactions and two high-grade CDOs of asset backed securities. All four of the transactions had a notional value of $3.5 billion as of Sept. 30, but New York-based Ambac Assurance Corp. instead made a cash payment of $1 billion. The CDOs squared were made up of A-rated CDOs of ABS tranches, and the other two CDOs originally had collateral consisting of asset-backed securitizations of A- or higher. The company also said that it expects it will be able to make positive adjustments to its mark-to-market and impairment reserves as a result of the settlements. These latest actions bring Ambac’s total commuted transactions to five, equal to $4.9 billion in notional exposure. Among those transactions, there were three CDO-squared transactions that were perceived to be the riskiest segment of the company’s CDO portfolio, David Wallis, Ambac’s chief executive officer, said in a statement. Standard and Poor’s Ratings Services in New York yesterday cut its financial strength rating on Ambac Assurance to “A” from “AA,” and slashed senior debt and hybrid securities ratings on holding company Ambac Financial to “BBB” and “BB+” from “A” and “BBB+,” respectively.