Ambac Financial Group, Inc. (NYSE: ABK) shares dropped sharply today after the company announced that it would raise $1.5 billion by issuing stock in an effort to maintain its rating. The move will massively dilute existing shareholders by nearly tripling the number of shares while many analysts still question whether it will be enough for the bond insurer to stay alive. Meanwhile, investors sold off the stock again as questions intensify regarding Ambac’s ability to stay afloat. So, will this latest attempt be enough to pull the company out of the water?

Ambac initially ran into trouble when the subprime mortgage market collapsed. Many complex securities comprised of these mortgages and other assets (like CDOs) saw their values decline substantially- and these were insured by Ambac. Now, Ambac is responsible to paying out these claims that many estimate to be $100 billion for the entire financial sector. Many activist investors like Bill Ackman suggest that there simply is not enough money to go around and believes bond insurers will be forced to declare bankruptcy. Meanwhile, Buffett even pulled his offer to help amid worry.

That’s not the only problem: Bond insurers are also losing out on any new business. These companies rely heavily on ratings organizations to give them credibility, so the recent downgrade by Fitch from “AAA” to “AA” puts Ambac in some serious trouble. It is unlikely that the company will be able to attract any new business without a top “AAA” rating. Ambac’s latest attempt to raise $1.5 billion is designed to help it regain this “AAA” rating, but many analysts feel that it will still come up short. Fitch analyst Thomas Abruzzo said in an interview that the company still don’t have triple A levels of capital even with this raise. Instead, they need to effectively lower the downside risk on the structured finance CDOs that they have insured, which now amounts to around $32 billion.

Finally, the move also has shareholders outraged. The troubled bond insurer priced the shares at $6.75, which is 9% below Thursday’s closing price. Since the new shares will more than triple the number of shares outstanding, this effectively automatically lowered the stock price by ten percent without warning while also forcing existing shareholders to share much of any potential upside. Ambac said that it has already sold 14.1 million shares in a $95 million private placement while concurrently pricing a $250 million offering of five million equity units.

In the end, this is bad news for shareholders as they are not only diluted but still own a company with serious problems. Many analysts are unsure whether or not Ambac will be able to pull itself out of the water, and shares are likely to only continue their move downwards until everything gets sorted out. Combined, these factors make ABK a stock worth watching!

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