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ACA Announces Fourth Forebearance Pact

CHICAGO — ACA Financial Guaranty Corp.’s parent yesterday announced that it had entered into a fourth forbearance agreement with its counterparties on derivative transactions, leaving in place through May 30 a waiver on collateral requirements, termination rights, and other policy claims triggered by its downgrade last year.

“The company is pleased to have reached an additional agreement with its counterparties and continues to work closely with them to develop a permanent solution to stabilize its capital position,” read a statement issued by the parent ACA Capital Holdings Inc.

Insurance regulators in Maryland — where ACA is domiciled — approved the extension of the agreement, which can be further extended under certain conditions, indicating in a statement that ACA had made headway in reaching a more permanent solution to its problems.

“This is a complicated matter that takes time to resolve in the best interests of all stakeholders; however, the administration is satisfied that significant progress is being made toward a permanent restructuring solution,” Karen Barrow, spokeswoman for the Maryland Insurance Administration, said in a statement.

The forbearance has prevented the administration from initiating delinquency proceedings against the company. A previously announced review of the company by the regulatory agency is still ongoing.

The agreement marks the fourth entered into between the insurer and its 29 counterparties since Standard & Poor’s — the only rater that assigns a rating to ACA — downgraded its single A rating to CCC on Dec. 19. Absent the forbearance agreements, the company would have been required to put up about $1.7 billion in collateral, which it could not afford. The latest forbearance agreement replaces one announced in February at which time the company said it had hired the Blackstone Group as financial adviser.

In 2007, ACA backed 31 public finance deals for a combined total of $648.7 million, according to Thomson Reuters.

A Moody’s Investors Service report earlier this year said about 20 banks have exposure to monoline bond insurers via credit default swaps that hedge about $120 billion of asset-backed security collateralized debt obligations.

“The eroded creditworthiness of some financial guarantors has already led a number of banks and securities firms to recognize losses or to establish counterparty reserves on their CDS hedges with financial guarantors, although not all of these firms have disclosed the size of such reserves,” analysts wrote.

ACA has publicly disclosed between $18 billion and $19 billion in asset-backed security CDOs on its books.

The firms that have disclosed losses based on exposures to insurers, such as Merrill Lynch & Co. and Canadian Imperial Bank of Commerce, attribute much of the losses to hedges associated with ACA. In January, Merrill announced $1.9 billion in ACA-related write-downs, while CIBC reported a $2.5 billion write down, made up in part of falling values in CDS protection offered by ACA.

A review by Oppenheimer & Co. analyst Meredith Whitney in January estimated that UBS, Citi, and Merrill had a large exposures to ACA. She also wrote that Wachovia Bank NA, Goldman, Sachs & Co., Bank of America NA, Deutsche Bank, Lehman Brothers, Royal Bank of Scotland, and Morgan Stanley have some exposure.

In other insurance-related developments yesterday, Moody’s released a report saying it would maintain its negative rating outlook on Ambac Assurance Corp.’s Aaa rating following its parent — Ambac Financial Group Inc.’s — announcement Wednesday of a net loss of $1.66 billion in the first quarter. The loss was driven by problems with subprime-related securities it guarantees, including nearly $1 billion set aside by the company for claims.

The losses come in a quarter during which Ambac raised about $1.3 billion and freed about $390 million more through ceasing to write new structured finance business and allowing some policy exposure to expire.

Moody’s wrote that Ambac’s losses in its mortgage-related securities portfolio are now somewhat higher than the rating agency’s prior expected-case loss estimate, but remain below the stress-case losses used to evaluate the company’s capital adequacy.

“In Moody’s view, the substantial increase in losses reflects both the significant volatility of the company’s mortgage-related risk exposures as well as the challenges inherent in estimating the losses that will ultimately develop from this portfolio over time,” analysts wrote.

Moody’s warned that if its ongoing evaluation of US mortgage dynamics leads to an upward revision in stress-case assumptions used to evaluate Ambac’s capitalization, the insurer’s rating could be placed on review for possible downgrade if it fails to meet the higher capital threshold.

Ambac executives believe that despite the losses, the company’s capital position remains strong enough to maintain its triple-A rating. Standard & Poor’s also assigns a negative outlook to the AAA credit. The company expects to free up an additional $390 million in the second quarter to exceed Moody’s Aaa threshold. Regulators and analysts yesterday in published reports countered Ambac’s more positive portrayal of its position, warning that the insurer may need to raise additional capital to cover further losses.


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