Ambac to commute $3.5 billion in CDO exposure

Ambac Financial announced on Wednesday that it has arranged a deal with counterparties to close out exposure to four collateralised debt obligations (CDOs) with a cash settlement of $1 billion.

Two of the transactions were CDO of CDO of asset-backed securities (ABS) - or CDO-squared, which were originally composed of collateral consisting of A-rated CDO of ABS tranches. CDO-squared transactions are normally made up of leveraged single-tranche CDOs in which the underlying assets are either CDO tranches or a mixed pool of CDO tranches and ABS. The other two were high-grade CDO of ABS exposures which were originally collateral consisting of asset-backed securitizations rated A- or higher.

The majority of the collateral on these transactions had subsequently been downgraded to below investment grade; all of them had also been internally downgraded to sub-investment grade.

"My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction," chief executive David Wallis explained in a statement issued by the company.

The company expects the move to allow it to record positive adjustments to its aggregate mark-to-market and impairment reserves and boost the rating of its Ambac Assurance arm.

The company has now commuted five CDO transactions - a total notional exposure of $4.9 billion. On August 1, Ambac closed out a $1.4 billion AA transaction that was initially composed of AA-rated CDO of ABS tranches for a cash payment of $850 million. This transaction had also been downgraded to sub-investment grade since its inception.

See also: Ambac and MBIA record heavy Q3 losses
MBIA and Ambac in further ratings review
Ambac clears deck of $1.4 billion CDO-squared