Ambac shares plunge on reorganization plan

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NEW YORK (CNNMoney.com) -- Shares of bond insurer Ambac Financial Group Inc. plummeted in Wednesday trade after the company said it would raise $1.5 billion in capital and reorganize its business.

Ambac (ABK) shares, which had been halted at midday, pending company news, plunged 16% on the New York Stock Exchange in afternoon trading.

The New York City-based company said it would raise at least $1 billion through an offering of its common stock, and an additional $500 million through a public offering of equity units.

"This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base," Ambac Chairman and CEO Michael Callen said in a statement.

The company also disclosed in a Securities and Exchange Commission filing that it would discontinue writing insurance on certain structured finance products including all mortgage-backed securities and collateralized debt obligations, or CDOs - investment vehicles that buys and sell bonds.

But the company did not go so far as to say it would split the two core components of its business - its healthy municipal bond division and its troubled structured finance arm.

A number of rescue plans for the bond insurers have been floated in recent weeks, but it was widely speculated that the most likely outcome was a break up of the company.

Earlier in the week, reports surfaced that a group of eight banks were planning to inject about $2 billion into the troubled bond insurer to stave off a rating downgrade.

Following Wednesday's announcement, two of the leading credit rating agencies issued statements. Moody's Investor Services said it believes that if Ambac were to successfully raise capital through the offerings it would affirm the company's top-notch AAA rating.

Fitch Ratings, which had downgraded Ambac to a AA from AAA on Jan. 18, echoed those remarks, saying it expected Ambac to retain its rating if its capital-raising efforts were successful. Fitch warned, however, that it did not expect Ambac to regain its AAA rating until its subprime risk was "effectively contained."

The third major rating agency, Standard & Poor's, did not issue a statement. Last week, S&P affirmed Ambac's AAA rating.

For months, the fate of the bond insurance industry, particularly Ambac and larger rival MBIA Inc. (MBI), have occupied much of the market's attention.

The two firms, among others, guaranteed billions of dollars worth of toxic mortgage-backed securities in recent years that have plummeted in value. Worried that they will not be able to handle existing claims and retain enough capital, the credit rating agencies have threatened to strip them of their top-notch 'AAA' ratings.

Some fear that ratings downgrades could ripple across the broader financial sector, sparking another wave of writedowns at the nation's largest financial firms.

A downgrade would also most likely raise the cost of issuing municipal bonds, which directly affects local governments and could create an additional drag on the already troubled U.S. economy.