Feb. 29 (Bloomberg) -- Ambac Financial Group Inc., the AAA rated bond insurer seeking to avoid a crippling downgrade, cut its dividend and will suspend writing guarantees on new asset- backed securities for six months to bolster capital.

The dividend will be reduced to 1 cent from 7 cents, New York-based Ambac said today in a statement. Halting the asset- backed business will free up $600 million in capital, Ambac said.

Ambac is in talks with banks to raise $3 billion to satisfy Moody's Investors Service and Standard & Poor's that it deserves its AAA credit rating. Moody's today gave the company more time and said the extra money may be enough to meet its target. Ambac and MBIA Inc. came under scrutiny over the past three months after losses on asset-backed securities such as collateralized debt obligations.

``Moody's continuing review will focus on both the further refinement of, and execution of, those capital plans, as well as on substantive changes that Ambac is implementing to its risk and operating strategies going forward,'' Moody's analyst Jack Dorer said in the report today.

Moody's said two weeks ago that it aimed to complete its review of Ambac and MBIA, the two largest bond insurers, by the end of the month. A downgrade of Ambac would stymie its ability to guarantee debt and strip the AAA stamp from $556 billion of municipal and asset-backed bonds.

Echoing MBIA

Ambac's decisions to slice its dividend and suspend new asset-backed securities business echo those of MBIA, which also said it would separate its municipal insurance from asset-backed guarantees within five years. Both companies also plan to stop writing credit-default swaps on debt.

Ambac fell 66 cents, or 5.6 percent, to $11.14 in New York Stock Exchange composite trading. The shares are down 87 percent over the past year.

Ambac and MBIA are paying the price for expanding beyond municipal debt into securities such as CDOs, which repackage pools of assets and slice them into pieces with varying ratings. Citigroup Inc. helped create at least $6.9 billion of CDOs insured by Ambac that have tumbled in value, according to research by Tavakoli Structured Finance Inc.

Of the $22 billion of Ambac-insurer CDOs linked to the mortgage market, about $7.5 billion were underwritten by Citigroup, which is among banks seeking to help Ambac raise capital. Of those CDOs, $6.9 billion are experiencing so-called events of default, Tavakoli said. Such events signal the most- senior classes may not be paid in full.

Talks With Banks

Ambac, the second-largest bond insurer, spent the past month in talks with at least eight banks after scrapping plans for an equity offering. The financing may be through a sale of $2.5 billion shares to existing stockholders and an issue of $500 million in surplus notes, the Wall Street Journal reported Feb. 25.

New York Insurance Superintendent Eric Dinallo said private equity firms were also helping with the rescue.

Ambac's current capital exceeds the minimum required for a Aaa rating, though it is short of the targeted level, Moody's said in today's statement.

``We are actively pursuing a plan to further augment our capital resources in order to achieve Moody's Aaa target,'' Ambac Chief Executive Officer Michael Callen said in the statement.

MBIA's ratings were affirmed Feb. 26 after the Armonk, New York-based company raised $3 billion, agreed to stop insuring asset-backed debt for at least six months and said it would separate its municipal and asset-backed businesses within five years.

Discontinued Businesses

Ambac will discontinue its financial services business, through which it offers investment agreements and interest rate swaps, both guaranteed by its insurance company. Moody's said in reports this week that those businesses ``place incremental negative pressure on its ratings.''

The company said it would no longer back securities using credit-default swaps, following MBIA's lead. The guarantees, written in the form of derivative contracts, require the bond insurers to change the value of the contracts to reflect changes in the market price.

Ambac may also choose to separate its municipal and asset- backed guarantee businesses, Moody's said. Under that scenario, the asset-backed unit would ``be more challenged'' to maintain a AAA rating.

``The stakes are high so the rating agencies are being very careful,'' said Scott Stewart, a professor at Boston University School of Management. If Ambac lost its top rating, ``the result could be a very large liquidity problem for the market,'' he said.

To contact the reporter on this story: Emma Moody at emoody@bloomberg.net

Last Updated: February 29, 2008 18:07 EST