Ambac reported a massive $1.539 billion mark-to-market gain on credit default swaps (CDSs) in the first quarter – an upswing largely due to its own deteriorating financial condition.
According to results released on May 11, the sizable gain was primarily the result of widening credit spreads on the firm’s Ambac Assurance division.
From the beginning of the year to March 31, par CDS spreads on Ambac Assurance have ballooned from 2,105.1 basis points to 3,220.52bp, according to Bloomberg. By market close yesterday, they were at 3,340.92bp.
The rise is bad news for dealers that bought insurance from the troubled monoline, which will have to mark down the value of the CDS protection purchased. But just as dealer counterparties to Ambac will have to mark down the value of protection bought from the monoline, so Ambac has to mark up its derivatives book to account for its own credit spread.
Ambac is not the only financial institution to see profits from its own weakening credit position – several banks reported one-off gains in the first quarter of this year, as their own CDS spreads widened faster than those of their counterparties.
Ambac’s $1.539 billion fair-value gain would have been bigger, the company reported, had it not been for the effect of continued stress in the structured credit market. This was reflected in lower prices and downgrades among insured assets, such as subprime collateralised debt obligations. Without this, the total positive adjustment would have been as much as $4.489 billion, the firm said.
The firm’s unrealised fair-value gain was also partially offset by insurance and investment losses on Alt-A residential mortgage-backed securities. Overall, Ambac reported a net loss of $392.2 million for the first quarter, an improvement on the firm’s $1.66 billion loss during the first quarter of 2008.
Like other monolines, Ambac has sought to rid itself of its most worrisome structured finance guarantees by settling – or ‘commuting’ – them on mutually agreeable terms. It is also trying to separate its municipal finance guarantee business to allay concerns about its reputation and creditworthiness.
On April 13, New York-based Moody’s Investors Service downgraded Ambac’s debt to Ba3.
More on Credit Risk
Jacky Lee and Luca Capriotti present an arbitrage-free valuation method for counterparty exposure of credit derivates portfolios.
EU lenders say both EBA proposals would distort capital requirements
Hedge funds target 10–12% returns on credit risk from unpaid invoices
Asean Economic Community faces challenges, says deputy governor Muhammad bin Ibrahim
Sign up for Risk.net email alerts
Sanjay Sharma talks about risk transparency and how his book helps achieve it.
A five-minute formula from Alexander Denev that takes you through a simple probabilistic graphical model and explains how and why these are used. Find out more about the ground-breaking book, Probabilistic...
Industry leader Vincent Kaminski discusses the challenges faced by energy markets and his new book, Managing Energy Price Risk, 4th Edition.
Momtchil Pojarliev talks about his book, The Role of Currency in Institutional Portolios, currency investing and the potential role of currencies in institutional portfolios.
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.