Late yesterday, bond insurer Ambac Financial Group (ABK: sentiment, chart, options) said it reached a deal with counterparties to commute $3.5 billion in collateralized debt obligations (CDO) in exchange for $1 billion in cash. The agreement will allow Ambac to record positive adjustments on its aggregate mark-to-market and impairment reserves. CEO David Wallis stated, "We have now successfully commuted five CDO transactions representing $4.9 billion of notional exposure, including three of the CDO-squared transactions that had been widely perceived to be the riskiest segment of our CDO portfolio."

In fact, earlier Wednesday, S&P Ratings hit ABK's Ambac Assurance unit with a 3-notch downgrade due to the potential for further CDO losses. Specifically, the ratings agency slashed its financial strength rating on Ambac Assurance from "AA" to "A."

After plunging 33% yesterday and hitting an all-time low of 76 cents per share, ABK is on the upswing this morning. With just a few minutes until the opening bell rings, the shares appear poised to gap higher and reclaim the $1 level.