ACA Given Second Chance to Solve Problems
In a statement on Sunday night, ACA Capital Holdings Inc., the parent of troubled bond insurer ACA Financial Guaranty Corp., announced that it has obtained more time from its trading partners to work out its problems, entering into a a second "forbearance agreement" with its counter-parties, which include many Wall Street firms and banks. They will continue to hold back from requiring the financial guaranty unit to post billions in collateral to the credit guarantees it has provided or to terminate these contracts.
The second agreement, which follows the expiry of a previous 30-day agreement last Friday, gives ACA Financial Guaranty until February 19 to find a solution to avert collapse.
The bond insurer lost its single-A, investment-grade, financial strength rating in mid-December when Standard & Poor's, the only rating company that rates ACA, slashed it to the deep junk rating of triple-C. ACA wrote insurance on $69 billion in corporate and mortgage debt securities over the last few years, but some of the securities it guaranteed were backed by subprime mortgages that are rapidly deteriorating. The company has capital of $425 million, and its downgrade meant it would have to fork out at least $1.7 billion to its counter-parties -- cash it didn't have.
Many buyers of this insurance were Wall Street firms and banks, which entered into contracts called credit default swaps with ACA to hedge their holdings of mortgage securities. Some of these firms, including Merrill Lynch and Co. and Canadian Imperial Bank of Commerce, have disclosed substantial losses and write-downs tied to these hedges because ACA won't be able to fully meet its obligations.
The company is seeking to unwind its credit default swap agreements in an orderly manner. It is also discussing a possible rescue plan that will give its counter-parties stakes in a restructured bond-insurance company, according to people familiar with the matter. An alternative plan involving a capital infusion is also being considered. In its statement on Sunday, ACA said it "continues to work closely with (its counter-parties) to develop a permanent solution to stabilize its capital position."
Source: Source: Wall Street Journal | Published on January 21, 2008
Are you a retail Agent Looking for a Quote?