March 7 (Bloomberg) -- Ambac Financial Group Inc., the world's second-largest bond insurer, raised about $1.5 billion in a sale of shares and convertible units, more than doubling its stock outstanding to salvage its AAA credit rating.

Ambacrose $2.08, or 28 percent, to $9.50 in New York Stock Exchange composite trading. The company sold shares at $6.75, a 9 percent discount to yesterday's close. Chief Executive Officer Michael Callen, Chief Financial Officer Sean T. Leonard and other executives and directors purchased shares at that price, according to regulatory filings today. New York-based Ambac also issued $250 million of units convertible into shares.

While the sale will dilute the ownership of shareholders, the offering probably will be enough to convince New York-based Moody's Investors Service and Standard & Poor's to affirm Ambac's rating. The companies threatened to downgrade Ambac after the company posted record losses on subprime-mortgage securities, putting at risk the credit ratings of $556 billion of municipal and asset-backed securities.

``They might be able to maintain the ratings at Moody's and S&P for the time being, but it's a Band-Aid,'' Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York, said in an interview with Bloomberg Television. Haines said the market was looking for Ambac to raise as much as $3 billion.

Cerberus Investment

Existing shareholders, new investors, private-equity firms and banks all bought stock, Callen said in an interview today. New York-based private-equity firm Cerberus Capital Management LP invested $50 million in the equity units, Callen said.

Banks bought 40 percent of the shares, with underwriters taking $405 million of common stock, and Royal Bank of Scotland and BNP Paribas buying $95 million of shares through a private placement, according to Paul Burke, an Ambac spokesman.

In total, Ambac sold 171.1 million shares and the sale's managers have an option to sell 25.7 million more, taking total proceeds to $1.5 billion, Ambac said in a statement today. The units convert to shares in 2011 and carry a yield of 9.5 percent.

Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG managed the sale.

``The AAA is now solid,'' Callen said on Bloomberg Television.

The sale mainly attracted existing shareholders, though some new investors also bought stock, Callen said. After a 92 percent slump in the past year, the offering ``wasn't the easiest thing to sell,'' Callen said. Ambac's market value had declined to $754 million at the close of trading yesterday.

`Big Challenge'

``It was a really big challenge,'' Callen said. ``We started this process 24 hours ago. I was worried about the response, but we worked hard.''

Ambac said earlier this week that it planned to sell $1 billion of common shares and $500 million of convertible units. All but $100 million of the proceeds will go to the company's Ambac Assurance unit, Ambac said. That $100 million will be used to pay off some of the holding's company's debt. Ambac has long- term borrowings of $1.7 billion, according to company filings.

Most of the bond insurance industry, including Ambac and its larger competitor MBIA Inc., stumbled after expanding beyond municipal insurance to guarantees on collateralized debt obligations or CDOs that have since plunged in value. CDOs package pools of securities then split them into pieces with different ratings.

Cutting Dividend

In addition to selling shares, Ambac plans to bolster capital by cutting its dividend to 1 cent from 21 cents a share and suspend its business of writing guarantees on many kinds of bonds, including those backed by mortgages.

The loss of Ambac's top rating would cast doubt on the more than half a trillion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt.

Ambac abandoned a plan to sell shares in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock and canceled the offering Jan. 18.

Some analysts said earlier in yesterday that the revived offering wouldn't be enough to stabilize Ambac's ratings.

``Based on our estimate that Ambac will eventually absorb about $11 billion of losses from insured CDOs and mortgage-backed securities related exposures, $1.5 billion of new capital at first blush does not seem like enough to fix the capital adequacy problem,'' Andrew Wessel, an analyst at JPMorgan Securities in New York, said in a March 6 research report.

To contact the reporters on this story: Christine Richard in New York at crichard5@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: March 7, 2008 16:28 EST