Ambac’s Backstop: Would You Rely On These People?

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Ambac and government officials, clearly dismayed at the skepticism over the $1.5 billion rescue financing plan announced yesterday, have been spreading the word that the banks underwriting the deal have agreed to “backstop” the deal if market demand for the shares and equity units falls short. Private equity investors have also agreed to buy what the Wall Street Journal describes as “a certain portion” of the shares on the open market.
But how firm are these commitments? It’s almost impossible to know because Ambac did not disclose the backstop yesterday when it filed the prospectuses for its pair of offerings with the SEC. That means investors are being asked to rely on vague talk from unnamed sources, which is hardly a recipe for confidence.
What’s worse, we’re all too well aware that banks and private equity firms have all found ways out of supposed firm commitments to takeover deals in recent months. If Ambac does continue to lose market share to competitors, including upstart bond insurer Warren Buffett, or if the credit markets continue to be turbulent, it wouldn’t be very hard for banks to decide the situation had worsened enough to let them out of their backstop commitments. All financings have conditionality built-in, allowing banks to withdraw under certain circumstances.
It doesn't help that Ambac has been acting so odd through this. Why did they hold the news of the backstop back a whole day? Reuters reported today that the backstop was not disclosed "because backstops are sometimes seen by investors as a sign of issuer weakness." That might make sense in when a company goes public with an IPO, but it's hard to believe that there are any investors who aren't already clued in to Ambac's weakness. In this case it smells like pure spin.
ABK Problems Not Over [CNBC]
Ambac's Capital Plan: Far Enough? [Wall Street Journal]
Banks Committed to Backstop Ambac Shr Sale-Source [Reuters]

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