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Today Andrew Moloff of Evercore Asset Management published a copy of a letter to Ambac's (ABK) board, in which he suggested strongly that they give up on their capital plan and let the company go into runoff.
His reasoning, which is impeccable, is that the company is worth far more to the shareholders that way than if they give it away by raising equity capital. Because Adjusted Book Value, which was over 80 a share as of the end of the last quarter, is radically higher than the current market price, as low as 4.50 today, the shareholders stand to realize far more in a runoff than if the company raises expensive equity capital.
After doing the math on hypothetical equity offerings at 6 a share, I think management would be well-advised to decline to raise capital under today's prohibitive conditions. Assuming S&P's stress case loss estimates, adjusted upward due to their recent change to 19% cumulative losses on 2006 Sub-prime, are an accurate estimate, I see in excess of 40 per share salvage to the shareholders.
On the other hand, If over 1 billion of capital is raised by issuing equity, the share value would be more like 19 a share after accounting for losses, and assuming valuations return to normal.
I own ABK in my personal portfolio and I will be writing to the board, making the same suggestion. Perhaps it is time for Ambac to take their ball and go home. That seems better than giving in to the insanity of the marketplace.
Tom
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Comments (1)
Tom, Looks like you put a high probability on the survival of these insurance companies. Do they have the money to pay off all the phony mortgages (subprime!)turned into CMOs by Merrill and Lehmans. May be you can explain the underpinnings of your hope for ABK ..
Posted by gullapalli | January 18, 2008 9:57 AM