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
marketplace."
"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
swaps."
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
management.
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
subsidiary.
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.
