Afternoon:
10°c
Billionaire to rescue of crisis-hit US insurer
James Doran, Evening Standard24 Jan 2008
Billionaire vulture fund operator Wilbur Ross is in takeover talks with Ambac, the troubled bond insurer whose recent financial crisis was a major factor in this week's dramatic US interest rate cut.
The Evening Standard has learned that a deal for the stricken $14 billion (£7.2 billion) US company, which insures bonds issued by a host of British businesses including Arsenal Football Club, Punch Taverns and the backers of Tube infrastructure projects, could come within the next two weeks.
Insiders said the negotiations are serious and progressing well. News of the talks came after last night's dramatic intervention by US regulators to rescue the stricken bond insurance market.
Wall Street banks are in talks with New York's insurance superintendent, Eric Dinallo, about raising capital to shore up the likes of Ambac, which have been badly hit by the collapse of the credit market, which they insure.
If bond insurers collapse, trillions of dollars of the debt they underwrite would have to be downgraded. The banks holding the debt would be hit by even bigger losses and companies issuing the debt would face higher repayment costs.
The bond insurance crisis is being talked of as the next tidal wave in the global credit crunch, following the sub-prime mortgage market collapses. News of the regulatory intervention triggered a big turnaround on Wall Street, as a 326-point deficit on the Dowswung to a 299-point gain by the close.
Ross declined to comment on specific potential deals but said he was keen to buy a bond insurer to take advantage of a coming wave of consolidation.
The bond insurance industry, also known as monoline insurance, has been devastated since credit rating agency Fitch, downgraded Ambac from AAA to AA last week. Without an AAA rating, Ambac cannot write new business.
The downgrade was prompted by the fact Ambac has underwritten tens of billions of dollars of subprime-related debt held by Wall Street banks, and it is not known if it can bear such a huge liability. The prospect of Ambac's collapse was enough to spur the US Federal Reserve to cut interest rates by three-quarters of a point in an emergency move on Monday.
Bond insurers were set up to provide cover for issuers of US municipal and state debt but have recently branched out into widespread debt insurance.
"The monoline insurance industry's success depends on the reversal of some very unfortunate errors," Ross said. "It took what was a very safe industry and, through quite terrible misapplication of risk management, caused the troubles we see today."
He added that any deal would depend on whether "you really have your arms around the degree of insolvency" in the sector.
Another billionaire investor, Warren Buffett, is poised to enter the fray with his own monoline insurance outfit.
