Municipal Bond Forum
On Don’t Lose Sleep Over Bond Insurers Woes:
Q
It appears to me that the rating agencies are quite fickle since S&P has made a 180-degree turn and put ACA on negative credit watch with the possibility of a downgrade. ACA just had over a $1 billion write down. In the event of a downgrade below A, it is my understanding that they would have to come up with more than $1 billion in cash. Looking at the stock performance, it is my view that the investing public did not have a great deal of confidence in S&P’s rating view. After all, these are the same rating agencies that rated many Collateralized Debt Obligation (CDO) tranches AAA and have downgraded them several times in a relatively short period of time. Since the issuer pays the rating agency a fee, an inherent conflict of interest seems to exist. Congress and the regulators are just now starting to review this situation, since the public’s confidence in these rating agencies has waned. Beyond quoting S&P’s analysis, what is your internal analyst’s independent view on ACA and what remedies does ACA have now?
A
James A. Klotz responds:
ACA’s public finance business remains fundamentally sound, with capital and claims paying resources in excess of that required by S&P for an A-rated insurer. We have reviewed ACA’s portfolio of insured credits that FMSbonds has sold, and they are performing well, paying debt service on time. The CDO exposure that ACA carries on its books should not result in any monetary loss, so long as the CDOs mature in full, which ACA expects they will.
ACA will meet with Standard & Poor’s and try to resolve the rating agency’s concerns. Regardless of the outcome, ACA’s insured issuers continue to meet their obligations to bondholders in a timely manner. It is too early to speculate on the outcome of ACA’s discussions with S&P, but the rating agency has come away satisfied in past situations in which ACA’s strength was called into question.
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