NEW YORK (Bloomberg) — Ambac Financial Group Inc. fell as much as 20 percent in New York Stock Exchange trading after the company's plan to raise $1.5 billion fell short of investors' expectations and failed to allay concern it may lose its AAA credit rating.

Investors anticipated the company would raise as much as $3 billion, said Robert Haines, an analyst at CreditSights Inc.

"It's too little, too late," said Kevin Giddis, head of fixed-income trading in Memphis, Tennessee, at Morgan Keegan Inc., a brokerage and investment-banking firm. "I think the market expected more substance."

Ambac shares dropped and credit-default swaps rose, indicating worsening perceptions of credit quality, even though Standard & Poor's and Moody's Investors Service said they would probably confirm the company's AAA rating. Ambac is seeking added capital to offset record losses on collateralised debt obligations linked to sub-prime mortgages. With such a limited capital raising, Ambac may not be able to keep its AAA rating for long, said Peter Plaut, an analyst with hedge fund Sanno Point Capital Management in New York.

"Ambac's capital raising might save the company's AAA ratings in the short term, but the outlook for continued write-downs and impairments to capital clearly indicates that this is not a AAA industry," Plaut said. The sale will be split into $1 billion of shares and $500 million of equity units, New York-based Ambac said yesterday in a statement. There's no indication that banks are backstopping the offering, as investors had anticipated, leaving open the chance the sale may fail, said Haines of CreditSights, an independent bond research firm in New York.

"It's imperative that they don't allow this kind of link in the financial system to blow up," Haines said.

The loss of Ambac's top rating would cast doubt on $556 billion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings.

Ambac fell $1.24, or 12 percent, to $9.48 at 3 p.m. (Bermuda time) in New York Stock Exchange composite trading. The shares have tumbled 87 percent in the past year before today. A $1 billion equity offering would about double the amount of shares outstanding.

Credit-default swaps tied to Ambac's bond insurer rose 10 basis points after the announcement to 530 basis points, according to CMA Datavision in London. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The offerings will be managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, Ambac said in a filing.

Banks would lose as much as $70 billion if the top-rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated in January. MBIA's ratings were affirmed by Moody's and S&P last week. FGIC lost its AAA at all three ratings companies.

Banks bought bond insurance to hedge the risks of CDOs and other asset-backed securities they own that are now tumbling in value. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt, including municipal bonds.

MBIA retained its top rating 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 structured finance businesses within five years.

Responding to pressure to shore up capital, Ambac cut its dividend last week and said it will suspend writing guarantees on debt, including mortgage-backed bonds, to bolster capital, echoing MBIA's plan.