Ambac Converts Debt to Equity Again – Analyst Blog

On Wednesday, Ambac Financial Group (ABK) once again announced to have converted another $11.8 million in debt to 8.6 million shares of Ambac’s common stock. The common stock will be issued to holders of 9⅜% debentures due in August 2011.

 

Earlier on June 17, Ambac entered into an agreement with 9⅜% debenture holders to exchange $8.5 million in debt for 5.0 million Ambac’s common shares.

 

Subsequent to the conversion of debt to shares, outstanding common shares of the company totaled 302.0 million. At the end of first quarter of 2010, the company had 288.2 million outstanding common shares.

 

Ambac’s rigorous effort to lower its debt level is further established by this new conversion. Combining the earlier exchange announcement, the company converted $20.3 million worth of 9⅜% debentures, due August 2011, to 13.6 million shares of the company.

 

Previously, the company had commuted $16.4 billion of exposure to collateralized debt obligations of asset-backed securities and $1.4 billion non-collateralized debt obligations of asset-backed securities. In addition, it announced that it would commute certain other non-collateralized debt obligations of asset-backed securities with an exposure of $1.5 billion.

 

Reduction in the debt level will lower the interest burden on Ambac. The company will now have to pay off a reduced amount of debt, lowering the likelihood of a debt default, as it fears bankruptcy if it fails to reinvent its cash position and defaults on its debt.

 

However, Ambac continues to maintain its solid cash position. Though the company is reducing its debt levels, it is no way affecting its cash balance as it is just a conversion of the debenture into equity.

 

However, these positives could be somewhat marred by equity dilution stemming from higher outstanding shares. With the number of outstanding shares increasing, earnings per share might fall if Ambac fails to report improved earnings. We maintain our Neutral recommendation on the shares of Ambac.