subject: Ambac Converts Debt to Equity [print this page] Ambac Converts Debt to Equity Ambac Converts Debt to Equity
Ambac (ABK) recently announced to exchange $8.5 million in debt for 5,036,068 shares of Ambac's common stock. The common stock will be issued to bondholders of 9?% debentures due in August 2011.
At first-quarter 2010 end, the company had 288.2 million outstanding common shares. The company will have 293.4 million common shares outstanding, following the stock issuance.
The exchange contract further reinforces the company's concerted effort to lower its debt level. Recently, the company 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. Also, it announced to commute certain other non-collateralized debt obligations of asset-backed securities exposures worth $1.5 billion.
Ambac has been embroiled in difficulties for quite some time following the collapse of the U.S. housing market in 2008. The company suffered multiple rating downgrades, adversely impacting its ability to generate new business. Moreover, in March 2010, the state of Wisconsin took control of some of Ambac Assurance Corporation's worst-hit assets worth $64 billion to safeguard the company's more stable business insuring municipal bonds thus shielding the interests of its policyholders.
If it fails to pull through its cash position and default on its debt, Ambac even fears bankruptcy. Given these headwinds, a reduction in the debt level will provide some cushion, as the company will now have to service a lower amount of debt, reducing the likelihood of a debt default.
However, equity issuance entails equity dilution. With the number of outstanding shares increasing, earnings per share might fall if Ambac fails to report improved earnings, denting investor confidence.
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