Ratings-challenged bond insurer Ambac Financial Group, Inc. announced it has reached agreement with counterparties to terminate four collateralized debt obligations (CDOs) worth approximately $3.5 billion into $1 billion cash.

The New York-based guaranty insurer said the settlement it has reached with the parties ends exposure to risk mortgage-backed debt obligations with CDO holders commuting the obligations into cash payments.

The "A" rated CDO's had been downgraded to below investment grade since the inception of the transactions, Ambac said.

The insurer said that as a result of the settlements, it expects to record positive adjustments to its aggregate mark-to-market and impairment reserves.

In addition, the stress case losses in the rating agency capital models for these transactions combined exceeded Ambac Assurance Corporation's final payments. The settlements will result in an improved rating agency capital position for AAC, the insurer said.

David Wallis, Ambac's chief executive officer said in a statement, "My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction. Ambac has consistently emphasized that in this period of extreme uncertainty in the capital markets, the de-risking and de-leveraging of our balance sheet is our highest priority. These settlements represent positive and tangible steps towards that goal."

He said the company has successfully commuted five CDO transactions representing $4.9 billion of exposure, including three that were widely perceived to be the riskiest segment of our CDO portfolio.

"I am confident that further progress towards remediation of our book will be achieved," he said.

Standard & Poor's yesterday cut Ambac Assurance's financial strength rating from Aa3 to Baa1, its third lowest grade.

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Ambac Commutes Four CDO's To $1B Cash

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