AMBAC Inc. took the wraps off it

swaps affiliate, AMBAC Financial

Services LP, yesterday.

The venture marks the first fora

by a monoline bond insurer into th

swaps market. All of the insurerse

searching for new revenue as the

volume of new issuance drops frome

heady pace of the last two years.

"We are now in the municipal

swaps business," said W. Dayle

Nattress, president and chief execive

officer at AMBAC Financial

Services. "This is the next step iour

progression of serving the municip


"This new activity represents a

natural extension of AMBAC's

business plan whereby we leverager

existing expertise within the

municipal securities market," saidhillip B.

Lassiter, AMBAC's chairman,

president, and chief executive offer.

The new firm will offer a comple

range of short- and long-dated

interest rate swaps, AMBAC officia said.

The firm will also be active in th

taxable swap market, but primarilyo

hedge tax-exempt swaps.

All of the firm's transactions wl

be guaranteed by or carry a surety policy from triple-A-rated AMBAC.

AMBAC officials also tried to

address concerns that the new

subsidiary will put AMBAC in competion

with companies that it needs to

cooperate with to sell insurance.

"We won't be in competition with 90% of the people who underwrite

debt," said Michael W. Kelly,

managing director and head of finaial

products at the swaps firm. "Most

the market, including the regional

and most of the minority-owned

firms, don't have the ability to d


AMBAC joins the growing number

of highly rated municipal swap

providers, including Morgan Guaran

Trust, AIG Financial Products Corp

TMG Financial Products Inc., and

the separately capitalized swap

subsidiaries of some of the larger underwriters.

The company plans to run a

matched book, meaning it will seek to offset each swap with another sp

that has the reverse cash flows.

"We are not going to leverage up our risks. We are going to be hedg,"

Kelly said. The company will not b

taking large positions in derivatis

for trading purposes, he said.

Instead, the company will make i

profit on the bid/offer spread ofe

swaps it enters.

Steven L. Dymant, who joined

AMBAC from Merrill Lynch earlier

this year, will serve as managing

director and head of trading for t new

company. Kelvin Pan, who joined

from New York Life Insurance Co.,

will be vice president and head ofisk


AMBAC officials plan to offer

long-dated, synthetic fixed-rate sp

transactions but have not ironed o

all of the details. In such a

transaction, an issuer sells variae-rate debt

backed by a letter of credit, liquity

guarantee, or other credit

enhancement. The issuer then entera swap

to convert the liability to a fixerate.

The firm is working on alliances with others to provide the long-te

liquidity backing, officials said.

Other insurers are unlikely to

follow AMBAC's lead immediately.

Earlier this year, Financial Guaray

Insurance Co. was looking at the

swaps business, market sources sai

But FGIC officials later said they would not establish a swaps


AMBAC was the first of the

insurers to establish, in October91, a

subsidiary to offer guaranteed

investment contracts. Following AMC's

success, FGIC and MBIA established similar programs.

Derivatives professionals

suggested the other insurers wouldgain

wait on the sidelines until AMBAC

tested the market.

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