Ambac makes $1.539bn derivatives gain

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.

See also:

 'Technical' factors drive banks back to profit
NYSID causes first monoline CDS default
MBIA lances structured finance from municipal business
Fiscal strain poses challenges for monolines
Ambac appoints new CEO

 

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here