Thanks to an anonymous HW reader for this — Evercore Asset Management, LLC, who holds 700,000 Ambac shares, pled a case today to see the troubled bond insurer simply give up its fight to raise more capital. Here’s the full text of the letter sent to the board:
To the Board of Directors of Ambac: Evercore Asset Management, LLC (EAM) is a registered investment adviser with over $500 million in assets under management. We are long-term oriented, contrarian investors, with a typical holding period measured in years. We advise on more than 700,000 shares of Ambac on behalf of our clients. We wrote to you last month to express our opinion, as a co-owner of the company, on the undesirability of raising costly capital to preserve Ambac’s triple-A rating. We were extremely disappointed to hear yesterday’s announcement that Ambac plans to raise additional equity capital. When we first wrote to you about this on December 21st, the company’s stock was at $27 per share and we urged you not to contemplate the issuance of additional equity in order to preserve Ambac’s triple-A rating. The notion of issuing equity with the stock now at a small fraction of that late December price is simply absurd. It is impossible for the value of future business to even come close to offsetting the dilution that will occur. Municipalities are wrapping their bonds at the lowest rates in years, and Berkshire Hathaway is entering the business. Even if these things were not happening, it would still be impossible for new business to be sufficiently profitable to justify raising new capital. Furthermore, as we warned in our previous letter, there is no assurance that further capital increases will not be required by the rating agencies even if capital is raised now. Indeed, statements made by the agencies since we sent our first letter, including announcements yesterday from Moody’s and S&P, suggest that further capital requirements are more likely than not. Ambac’s market value has now shriveled to a few hundred million dollars. The sale of $1 billion or more of new equity amounts not so much to raising capital as it does to a sale of the company at an extremely depressed price. It is time for Ambac to recognize that, in entering the structured finance business, the company gambled its triple-A rating and has now lost that bet. Attempting to buy back the triple-A rating by giving away most of the company makes no sense. The business of triple-A guarantees must now be left to those whose previous actions have not saddled them with both a need to raise capital and a perception of potential losses of the magnitude that now causes Ambac to be priced at a small fraction of its book value. All that can be done now is to maximize the value of the existing book of business for the benefit of Ambac’s shareholders. The value ultimately realized from the existing book of business will depend on whether Ambac’s historically strong underwriting skills have insulated shareholders’ capital from further losses. Unless Ambac is still massively under-reserved for eventual claims, there is substantial economic value to be captured even in a runoff scenario. Adding back the mark-to- market losses that the company still claims do not predict future losses, adjusted book value (which fully recognizes net unearned premiums and the present value of future installment premiums) stands at roughly $86 per share. Against that alternative, a proposal to sell a significant amount of stock at the current price is unconscionable. Even if claims ultimately amount to a multiple of Ambac’s current reserves, the value realized in runoff will far exceed the current stock price. If, on the other hand, Ambac is massively under-reserved for eventual claims, then raising additional capital amounts to simply throwing good money after bad. From the standpoint of Ambac’s current shareholders, the owners of the company, there is absolutely nothing to be gained from continuing to attempt to maintain a triple-A rating. It would be far preferable to go either into a period of “hibernation” during which time the company would not actively pursue any new business where a triple-A rating from all three agencies is required or into outright runoff. Under either scenario, current shareholders could expect to receive considerably more value for their shares than they would if they are massively diluted by an attempt to maintain triple-A status. We implore you to not raise equity or any other form of capital, and we believe that other major shareholders agree with us. We are encouraged to see an announcement this morning that you are reconsidering, and we hope that this means you intend to accept the rating agency downgrades and the consequences that follow. However, since you have not responded to our previous letter, and your announcement this morning did not rule out raising capital, we feel that our fiduciary obligations to our clients leave us no choice but to make public our views on this in the hope of ensuring a stop to the destruction of shareholder value. We remain willing to engage in discussions with you at your convenience. Sincerely, Andrew Moloff Chief Investment Officer Evercore Asset Management, LLC
Suggesting that Ambac might be better in run-off mode than actively writing new policies is akin to suggesting investors would be better off were the guarantor to go out of business. Strong stuff, indeed. Disclosure: The author held no positions in ABK when this post was originally published.