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Capital Markets

Monolines: Ambac stares into the bankruptcy abyss

Insurer skirts close to capital limits; CDS liabilities could rocket

When Barclays Capital revealed details of its recent $12.3 billion Protium Finance transaction (see Credit exposures: Barclays pays up for Protium protection, Euromoney, October 2009), it was widely seen as an attempt to mitigate its exposure to monoline guarantor risk. Now we know why. The 10Q report filed by Ambac Assurance in early November makes for grim reading.  "Ambac’s liquidity is currently insufficient to fund its needs beyond the near term and failure to successfully execute on its current strategies could result in it running out of liquidity in the second quarter of 2011 or potentially sooner," the company warned. "As a result of Ambac Assurance’s deteriorating financial condition, regulators could commence delinquency proceedings."

Net inflow
The company is certainly flirting with disaster. It had a cushion of just $306 million above its minimum statutory capital limit at the end of the second quarter and analysts were warning that a breach could happen with the third quarter filing in November. When the filing was eventually made on November 19, however, it showed that the statutory surplus had actually risen to $855 million. The improvement in the capital position was driven by the commutation of four CDOs of ABS resulting in a net inflow of funds of $551 million.

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