Ambac Financial Group today dropped plans to split the bond insurer into two companies and instead announced it would raise $1.5 billion in new capital, eliminate its dividend and stop insuring risky debt for six months,

The New York-based firm's move was not greeted enthusiastically by rating agencies and investors.

Ambac also said it will discontinue underwriting certain aspects of risky debt business, including collateralized debt obligations and mortgage-backed securities.

The ratings agencies' reaction was mixed.

Both Moody's and Standard & Poor's said they would probably affirm Ambac's "triple-A" ratings if the capital-raising is successful, but Fitch disagreed.

It issued a statement following the announcement, saying that Ambac's "double-A" rating remains on negative watch because Fitch does not believe it will be possible for Ambac to regain its "triple-A" rating until its subprime risk can be "effectively contained."

Fitch said the new capital infusion and other moves will allow Ambac to "likely" achieve the level of capital needed to maintain a "double-A." "However, even with the additional capital, Fitch believes it's unlikely that Ambac would maintain the level of capital necessary to support a [triple-A] rating."

To maintain a "triple-A" rating, Fitch said that "Ambac needs to further limit the downside risk from its structured finance collateralized debt obligations through reinsurance or other risk mitigation initiatives.

"Fitch is evaluating whether Ambac can re-establish its position in the financial guaranty market, especially in the core municipal finance sector, before consideration of a return to [triple-A] ratings," Fitch officials said.

Ambac's plan calls for raising the new capital through a public offering of up to $1 billion in common stock and an additional $500 million through the sale of equity units.

This new plan replaces one where the bond insurer would have broken itself up into two units retaining its relatively stable municipal bond insurance business and moving its business of insuring securities derivatives into a new unit.

Oppenheimer & Co. analyst estimated in January that if the big bond insurers were to lose their coveted "triple-A" ratings. Banks could lose as much as $70 billion.

Ambac insures $556 billion of municipal and asset-backed securities.

New York Gov. Eliot Spitzer issued a statement praising the New York-based company for coming up with a plan to raise capital.

"At the State level, our goal has been and continues to be bringing stability to the bond insurers to protect the policyholders, including municipal bond issuers, investors and the banks," the governor said. "This critical capital injection will help Ambac maintain its current credit ratings."

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Ambac Drops Breakup, Plans To Raise $1.5B

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