Ambac Assurance Corp. has suspended writing credit protection on pools of corporate obligations that include standard or modified restructuring language because it does not think its concerns over the definitions are being satisfactorily addressed. In an e-mail to the International Swaps and Derivatives Association's end user committee, Michael Schozer, managing director and head of structured finance and credit derivatives at Ambac in New York, said, "We have decided to suspend writing new business with the standard Restructuring language, even at the "super AAA" level."
An official at Dresdner Kleinwort Wasserstein said Ambac pulling out of the market could result in structurers keeping the super senior tranches of synthetic CDOs. Structuring houses have traditionally sold the super senior tranche of deals because otherwise it has to be kept in the trading book and marked to market, which can cause large swings in profit and loss. However, as the price of holding the risk increases it starts to become worth putting up with the volatility, said the official. Another alternative is to buy protection without restructuring as a credit event and just hold the restructuring basis risk on the firm's book. The disadvantage of this is that it is hard to quantify.
Schozer told DW that the firm would continue to write protection on cash CDOs and asset-backed securities, because these do not include restructuring. The firm is also open to writing protection on synthetic deals if the structurers can negotiate a more acceptable definition.
The e-mail is a reply to another e-mail sent to the ISDA end user committee, which stated, "The feeling on the part of the bank hedgers and dealers is that the definition does not need to be addressed at this juncture." The main reason was the fact that deals were still being executed with restructuring as a credit event.
Ambac's credit-default swap portfolio is approximately USD26 billion (notional).
Go to DW's Web site (www.derivativesweek.com ) to see both e-mails.
