In the wake of bond insurer Ambac Financial Group's announced decision to suspend efforts to raise capital, Fitch Ratings has downgraded the firm's financial strength ratings.

The downgrades came Friday after Moody's Investors Service announcement Thrusday that it is reviewing the ratings of bond insurer MBIA Insurance Corporation for a possible downgrade.

Fitch aid it has downgraded Ambac Assurance Corp., Ambac Assurance UK Ltd., Connie Lee Insurance Co. insurer financial strength ratings to “double-A” from “triple-A.”

In addition, Fitch took actions lowering the following debt ratings:

o Ambac Financial Group, Inc., long-term rating to “A” from “double-A.”

o $400 million 5.95 percent senior unsecured notes due Dec. 5, 2035 to “A” from “double-A.”

o $142.5 million 9.375 percent senior unsecured debentures due Aug. 1, 2011 downgraded to “A” from “double-A.”

o $75 million 7.5 percent senior unsecured debentures due May 1, 2023 downgraded to 'A' from 'AA'; –$400 million subordinated notes due Feb. 7, 2087 downgraded to “A-minus” from “double-A-minus.”

Fitch on Dec.21, 2007 placed the ratings on Rating Watch Negative, where they remain. Fitch noted then that the company has a modeled capital shortfall of $1 billion at the “triple-A” rating threshold.

The downgrade places Ambac's operating subsidiaries' IFS rating at a level consistent with their currently modeled capital adequacy threshold without the benefit of the noted capital increase.

The downgrade in the holding company debt ratings, Fitch said reflects greater uncertainties surrounding Ambac's future earnings and fixed charge coverage ratios, together with movement to the more typical notching used at the “double-A” IFS rating level.

The decision to downgrade the IFS rating by two notches, coupled with the continuation of the Negative Rating Watch, reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction, Fitch said.

The rating agency also mentioned the insurer's uncertain capital markets and the impact of Ambac's recent decisions on future financial flexibility as well as the company's future capital strategy, the ultimate loss levels in its insured portfolio; and the challenges in the financial guaranty market overall.

Fitch said expects to resolve the Negative Rating Watch after the agency evaluates these various qualitative factors, and provide that feedback to the market upon the conclusion of this review.

Ambac Financial Group, Inc. is a U.S. holding company whose primary operating financial guaranty subsidiaries are Ambac and Ambac Assurance U.K Ltd.

For Sept. 30, 2007, Ambac Financial reported consolidated assets under Generally Accepted Accounting Principles of $22 billion and shareholders' equity of approximately $5.6 billion. On an aggregated basis, net par outstanding for Ambac totaled $556 billion as of Sept. 30, 2007.

Armonk, N.Y.-based MBIA Insurance Corporation saw Moody's Investors Service yesterday place its Aaa insurance financial strength ratings and its insurance affiliates on review for downgrade.

The Aa2 ratings of MBIA newly issued surplus notes, and the Aa3 ratings of the junior obligations of the insurance company and the senior debt of MBIA Inc. were also put on review for possible downgrade.

MBIA said that it was surprised by Moody's action in light of the rating agency's recent public statements on the company's capital plan and last week's Aa2 rating of the surplus notes.

The company said it was reaffirming its intention to continue working towards stabilizing its “triple-A” ratings from all three rating agencies and addressing Moody's remaining concerns.

MBIA noted that on Dec. 14, 2007, Moody's Report stated that if the Company “… re-established a robust capital position, Moody's would expect to revise the outlook to stable.”

Gary Dunton, MBIA Chairman and CEO said, “We have developed and are implementing a comprehensive capital strengthening plan in good faith reliance on Moody's stated requirements. The plan includes the Warburg Pincus commitment for $500 million of new equity and its agreement to backstop a $500 million rights offering, along with the issuance of $1 billion of surplus notes on Jan. 16.

“We have been proactive in raising a substantial amount of new capital to support our Triple-A ratings. We believe our capital plan meets or exceeds the requirements previously outlined by Moody's and the other two major rating agencies.

Mr. Dunton also noted that Fitch yesterday” affirmed our “triple-A” ratings with a stable outlook and Standard & Poor's confirmed that, even with their recently revised loss assumptions for 2006 vintage subprime exposure, MBIA exceeds their 'triple-A' capital requirements”.

C. Edward Chaplin, MBIA's chief financial officer, added that “MBIA is committed to maintaining its capital adequacy at levels that provide the highest degree of confidence in MBIA, and looks forward to working with all the rating agencies through the current market dislocations.”

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Ambac Ratings Cut By Fitch

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