ACA Extends Forbearance With 29 Counterparties On Derivatives

ACA Financial Guaranty Corp. reached an agreement Sunday with 29 counterparties to halt until Feb. 19 collateral requirements, termination rights, and policy claims related to the credit derivative transactions on the bond insurer’s books.

The extension was announced by the bond insurer’s parent, ACA Capital Holdings Ltd., after executives bought time from the counterparties with whom the company has transactions. A press release said the company “continues to work closely with [counterparties] to develop a permanent solution to stabilize its capital position.”

The deadline extension is the second received by ACA, after Standard & Poor’s downgraded the bond insurer to CCC from A last month. The credit derivatives that ACA has sold require it to post collateral if downgraded to below A-minus. With the drop to CCC, ACA was required to put up about $1.7 billion, an amount the company said it could not produce.

ACA is working on a long-term forebearance agreement or a capital plan, and has said it will defer to the Maryland Insurance Department, in the state where ACA is domiciled, if the regulator wishes to begin delinquency hearings. Maryland regulators, however, are concerned with protecting bondholders who own bonds backed by ACA.

The counter parties, including Merrill Lynch & Co., are concerned about their own exposure to the bond insurer. Last week, Merrill Lynch announced $1.9 billion in write downs on debt insured by the company, and some market sources expect further write downs to be announced in the coming weeks.

Calls to Alan Roseman, ACA’s chief executive officer, were not immediately returned.

Equity investors responded positively to the news, pushing ACA’s stock up 25%, or $0.12, to $0.60 at the close of trading yesterday.

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