Standard & Poor’s put its A rating for ACA Financial Guaranty Corp. on credit watch negative Friday afternoon, saying that the insurer’s $1.7 billion mark-to-market loss for the third quarter could affect ACA’s ability to generate new business.
Along with its bond insurance competitors, ACA has come under scrutiny during recent months for its exposure to subprime mortgage-relate securities. Standard & Poor’s is the only rating agency with a rating for ACA, which became a public company for the first time nearly one year ago.
“This action follows the release of the company’s third quarter financial results and reflects our opinion that the announcement of a substantial loss in its third quarter may impair ACA’s ability to generate a satisfactory level of new business,” Standard & Poor’s said in its release. The mark-to-market loss on ACA’s structured-finance portfolio led the company to take a $1.0 billion net loss for the quarter and dropped company stockholders’ equity to a negative $883.3 million as of Sept. 30 - down from $326.3 million three months earlier.
“Exacerbating the issue is the fact that the significant slowing of the subprime mortgage market directly affects two of ACA’s three product lines, possibly necessitating significant changes to the company’s business model.” Along with insuring municipal bonds, ACA also insures structured-finance transactions and has a collateralized debt obligation management business line.
Standard & Poor’s said a healthy subprime mortgage market was essential for the structured-finance and CDO business lines, and that ACA might have to “develop new strategies for future business.”
Also at issue is ACA’s recent loss of a $150 million liquidity facility for which it became ineligible when its book value dropped below the mandatory threshold.
“Current liquidity needs are minimal, but would escalate substantially to meet collateral posting requirements if Standard & Poor’s lowered ACA’s financial strength rating below ‘A-’ and or losses on certain structured credit transactions exceeded very high thresholds,” said Standard & Poor’s.
