Following its downgrade to CCC last week, ACA Financial Guaranty Corp., the market’s only bond insurer based on a single-A-rating business model, has until mid-January to right its ship.
The insurer’s parent company, ACA Capital Holdings Ltd., said in documents filed late Wednesday with the Securities and Exchange Commission that its counterparties in credit derivative transactions have agreed not to make ACA to post collateral on the deals until at least Jan. 18. As a result, insurance regulators in Maryland, where ACA is domiciled, said they
ACA expects to have in place by Jan. 18 a long-term forbearance agreement or some other long-term structure to relieve pressure on its capital adequacy, said a senior executive at ACA. While ACA is not forbidden from writing new business in the next month, the executive acknowledged that the prospects of backing bonds with a CCC rating are slim to none.
“It’s not that Maryland doesn’t want us to do new business,” said the executive who spoke on condition of anonymity. “We couldn’t do it if we wanted to.”
After putting ACA’s A rating on negative watch in November, Standard & Poor’s on Dec. 19 dropped its mark for ACA to CCC with a developing watch. Standard & Poor’s is the only rating agency that maintains a mark on ACA.
The rating action capped what had been a roller-coaster ride of a year for ACA.
Just last November, ACA was billing itself as a comeback story as it sold an initial public offering at $13 per share. The insurer had been forced to pull the plug on a first attempt at going public after its chief executive officer and chief financial officer both resigned amid controversy.
Current chief executive Alan Roseman was hired in May of 2004, though, and ACA retooled its business model to begin focusing more on its structured-finance and collateralized debt obligation management business lines.
The company followed-up last year’s IPO by hiring public finance veteran Peter Hill in February. At that time, Hill said the company would look to start boosting its municipal bond insurance business to supply a single-A rated product to an increasingly sophisticated pool of muni investors.
ACA insurance first appeared in the muni market in 1998, when the company backed 54 deals worth a combined $679.2 million, according to Thomson Financial. Since then, ACA has insured nearly $6.3 billion of state and local government debt, including $648.7 million in 2007.
The same day that Standard & Poor’s downgraded ACA, the insurer got its counterparties in credit derivatives deals to wait until at least Jan. 18 before enforcing the deals’ requirements for ACA to post collateral, the insurer said in its SEC filing. ACA’s credit derivatives, unlike those sold by other bond insurers, called for ACA to post collateral if it was downgraded past A-minus.
With the drop to CCC, ACA was suddenly required to put up about $1.7 billion — an amount the company has said it could not produce. ACA had about $426 million of statutory capital as of Sept. 30, according to the consent agreement with Maryland insurance regulators.
In its rating action, Standard & Poor’s said that ACA had not been diligent enough in looking for ways to raise new capital. Calling Standard & Poor’s stress-test models “Armageddon scenarios,” the ACA executive said his company had previously been told it had more than enough capital.
“We weren’t in any way, shape, or form looking to raise capital because in all accounts — even in the negative watch — capital was not the issue,” the executive said.
ACA agreed in the consent order that it will defer to Maryland regulators if they begin delinquency proceedings. The insurance administration, which is concerned with protecting the investors who own bonds backed by ACA, has said it will start such proceedings if at any time ACA is rated BBB-plus or lower and does not have forbearance agreements in place with its counterparties.
“Such proceedings may consist of a request that ACA be placed under conservation, rehabilitation, or liquidation,” the consent order said.
Maryland Insurance Administration spokeswoman Karen Barrow declined to make the letter of representations and agreements available, citing the confidentiality requirements of Maryland’s insurance rules.
Municipal investors have priced ACA-backed bonds more and more as if they had no insurance at all in recent weeks. Participants said last week that the Standard & Poor’s downgrade would not have much of an immediate effect on bond prices because levels already anticipated such a drop. Standard & Poor’s also dropped its ratings on more than 3,000 credits insured by ACA — nearly 2,400 of which were dropped to CCC.
Municipal issuers said they are watching situation closely but that they do not think ACA’s trouble will prevent many of the lower-rated issuers that typically buy ACA insurance from selling debt in the capital markets.
“We think that our hospitals would still have access to the capital markets, but maybe would have to pay a little more for it,” said Mark Hopkins, executive director of the New Jersey Health Care Facilities Financing Authority.
He said his authority has not yet devised a plan for what advice they’ll give borrowers considering an ACA wrap, but that the HCFFA has used creative methods to deal with market wrinkles in the past. “Usually there is a work-around in situations like this,” he said.
