Global Bond Insurance 2007

Committed Capital Facilities

Anchorage Finance Sub-Trusts I, II, III, IV

Analyst: Richard P. Smith, New York (1) 212-438-2095

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CREDIT PROFILE
US$400 mil ABC securities series 2002 (Relevant dependency: Ambac Assurance Corp.) xxx AA

Rationale
The AA rating on the asset-backed capital commitment securities (ABC securities) issued by Anchorage Finance Sub-Trust I, Anchorage Finance Sub-Trust II, Anchorage Finance Sub-Trust III, and Anchorage Finance Sub-Trust IV reflects the AA rating that would be applied to Ambac Assurance Corp.s (Ambac) preferred stock. The trusts have entered into agreements that allow Ambac to put its preferred stock to the trusts, at which time holders of the securities will become holders of Ambac preferred stock. Until such time as Ambac exercises its puts, the trusts will invest their assets in high-quality, short-maturity CP, diversified by both issuer and industry sector. Composition of the investment pool is governed by criteria designed to ensure that the quality of the pool is at least as high as Ambacs preferred stock rating. Investment income, net of certain transaction fees, plus a variable put premium paid by Ambac are sufficient to pay the return to investors as determined at the periodic auctions.

Structure
Anchorage Finance Sub-Trusts I, II, III, and IV are separate sub-trusts of Anchorage Finance Master Trust, a Delaware business trust sponsored by Merrill Lynch, Pierce, Fenner & Smith Inc. Each sub-trust issues $100 million in ABC securities. The rate paid on the ABC securities is determined at auctions generally scheduled every 28 days. Proceeds from the sale are invested in a diversified portfolio of CP, at least 80% of which must be rated A-1+, and the balance cannot be rated

lower than A-1. While CP must mature no later than the next scheduled auction, additional maturity restrictions are placed on A-1 rated paper. The Bank of New York (Delaware) serves as the investment manager for the trusts. Ambac pays a variable put premium that, together with investment income net of fees and expenses, is sufficient to pay the rate determined at auction. The put fee is uncapped. Auction rates are capped at 1.00% above the 30-day LIBOR rate as long as Ambacs financial strength rating is AAA from both Standard & Poors Ratings Services and Moodys Investors Service, and 2.00% if either agency lowers its rating on Ambac. Each sub-trust has entered into a put agreement with Ambac, giving Ambac the right to require each sub-trust to purchase Ambac preferred stock at any time. If Ambac exercises a put, the sub-trust will purchase the Ambac preferred stock and subsequently distribute that stock to the ABC securities holders and liquidate. Standard & Poors expects that Ambac is most likely to exercise the puts in the event that it experiences significant losses. Ambac has the right to cancel the put agreements, in which case the trusts will distribute proceeds of maturing assets (net of fees and expenses) and liquidate. ABC securities holders are at risk to investment losses. The possibility of loss has been minimized, however, through the investment guidelines that dictate the quality, diversity, and maturity of the investment assets. These guidelines were established to ensure that the quality of the investment pool is at least as high as Ambacs preferred stock rating. In addition, there is no market value risk in the structure because assets are held to maturity. In the event Ambac exercises a put, settlement for the purchase of the pre-

ferred stock occurs at an auction date, eliminating any market risk that would arise if investments had to be liquidated rather than allowed to mature.

Ambac Assurance Corp.

Ambac Assurance Corp. (AAA financial strength and financial enhancement ratings) is a leading monoline financial guarantee company and is the principal operating subsidiary of Ambac Financial Group, Inc. Ambac is active in the global capital markets, providing insurance to a variety of market sectors, including municipal securities, MBS, ABS, and structured credit derivatives. Ambacs AAA ratings reflect its: Consistent, successful execution of a well-defined, yet flexible, financial guarantee business plan; Conservative underwriting and riskmanagement strategies; and Solid capital position, strong claimspaying resources, and proactive capital sourcing philosophy. As of Dec. 31, 2006, Ambac reported statutory capital of $6.4 billion. Net income for the year ended Dec. 31, 2006, was $802 million. These figures are based on statutory accounting practices as prescribed by insurance regulators.

Ambac Preferred Stock

The AA rating on Ambacs preferred stock reflects the subordinated nature of preferred obligations versus policyholder obligations. The outlook on Ambacs ratings is stable, reflecting the companys strong franchise value, solid capital position, and prudent underwriting strategy. Currently, Ambac has no preferred stock outstanding. The preferred stock is perpetual, but Ambac may redeem the preferred stock at its option, at a price equal to the liquida-

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Committed Capital Facilities

tion preference plus declared, but unpaid, dividends. As long as the preferred is outstanding, Ambac may not pay cash dividends on any junior ranking preferred stock or its common stock. In addition, Ambac Financial may not pay cash dividends on its common stock unless dividends have been declared and paid on the

preferred stock, except that Ambac can pay common stock dividends in an amount to cover Ambac Financials debt service costs and operating expenses. Dividends are noncumulative; they will be cumulative, however, for that period of time when preferred dividends are not paid and Ambac is paying common stock divi-

dends to Ambac Financial. If Ambac fails to pay dividends in full for six consecutive quarters, the preferred holders have the right to elect two additional members to the Ambac board of directors, subject to regulatory approval. These directors terms will cease once Ambac pays four consecutive dividends on the preferred stock.

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