DOW JONES NEWSWIRES

Ambac Financial Group Inc. (ABK) settled one of its largest collateralized- debt obligations, with the bond insurer agreeing to pay $850 million to get out of insuring the $1.4 billion deal and eliminating a key area of uncertainty for the company.

Ambac shares closed Thursday at $2.52 and the stock surged 25% in premarket trading.

The firm has already recorded $1 billion in losses on AA Bespoke, a CDO of CDOs. Most of the CDOs included were originally AA-rated but have since been reduced to junk territory.

Because of the deal, Ambac expects to report a $150 million reversal of previously recorded losses.

Chairman and Chief Executive Michael Callen said, "The primary benefit of this agreement is that it eliminates uncertainty with respect to future losses related to this transaction. We view the final outcome as favorable in light of the numerous widely circulated models that assumed a 100% write-off for this transaction."

The move comes days after Merrill Lynch & Co. (MER) settled around $3.74 billion in mortgage securities with bond insurer Security Capital Assurance Ltd. (SCA), which will pay Merrill $500 million.

-By David Benoit and Kevin Kingsbury, Dow Jones Newswires; 201-938-2472

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  (END) Dow Jones Newswires
  08-01-08 0933ET
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