Thursday, December 27, 2007 2 comments ++[ CLICK TO COMMENT ]++

ACA Winds Down Operations

One of the smaler monolines, ACA Capital Holdings, is likely on its way to winding down whatever it can. Its stock was delisted last week(?) (didn't meet NYSE requirements) and today Maryland's insurance regulators started taking control of its operations. This move gives ACA Holdings some time to raise capital. Unfortunately, I don't think anyone is going to inject capital into ACA. Banks like CIBC, a big Canadian bank, have been thinking about providing some capital since ACA insured some of their bonds, but I suspect very little will be done in the end.

You can see the gravity of the situation by looking at ACA's potential losses under S&P's stress test here (read my original posting on the stress test here). As you can see, ACA has a capital base of around $600 million whereas S&P's stress test results in a loss of $2.1 billion. Given that ACA is a lesser known monoline, that is a huge loss (all of it in CDOs as well). In contrast, the bigger ones like Ambac and MBIA have big potential losses (in the billions) but they are far larger, have a stronger brand name, and seem to run their operations better. Very few people would be willing to provide money to ACA right now.

What kills bond insurers when they lose their rating are clauses like this:

n the SEC filing, ACA said that its insurance contracts typically include provisions that would have required it to post collateral in the event of a rating downgrade -- at least $1.7 billion in collateral based on its Sept. 30 obligations, ACA said. But, the company said it has received a waiver on those additional collateral requirements through Jan. 18.


I hope Ambac, MBIA, FGIC, and others, don't have to post collateral if they get downgraded (not sure what their contract says about downgrades). Any bond insurer that needs to post collateral will be toast since the par value exposure is massive compared to their actual capital on hand. That fact that bond insurers only have to pay out losses over time without posting collateral based on mark-to-market losses is what makes the business model work while seemingly everything is falling apart around them.

What happened to ACA is what will happen to the other bond insurers if they can't make it. The holding company will go to zero, and the actual bond insurer will be taken over by the insurance regulator. The underlying insurance contracts will likely survive until time expires in a decade or so from now...

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2 Response to ACA Winds Down Operations

Michael
December 27, 2007 at 6:33 PM

Ironically, Martin whitman is the proud owner of 10% of ACA. I suppose that's now down the tubes (if he didn't sell the remnants before delisting)

December 28, 2007 at 10:02 PM

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