ACA DOWNGRADE, DOES NOT IMPAIR
ISSUERS' ABILITY TO PAY

Standard & Poor’s took several rating actions today affecting five of the major bond insurers.

Deteriorating performance of subprime mortgage loans caused the rating agency to tighten its criteria and capital requirements for the bond insurance industry. As a result, a number of insurers were alerted by either receiving negative rating outlooks or being placed on creditwatch.

American Capital Access (ACA) saw its rating drop from “A” to “CCC,” a move that was severe and surprising to many in the capital markets. While ACA’s exposure to the subprime market through its insurance of Collateralized Debt Obligations (CDOs) was large, the company had experienced very few actual dollar losses to date. Nevertheless, the large writedown of its CDO exposure in the third quarter of this year severely impacted its financial results on paper. S&P believed that ACA’s rating was therefore no longer warranted.

FMSbonds has been aggressively monitoring ACA’s insured municipal bond portfolio and will continue to do so. To date, ACA’s insured credits continue to perform satisfactorily, paying debt service when due without ACA’s help. 

Wall Street vs. Main Street

It is important for investors to recognize that the current problems affecting Wall Street are not necessarily affecting Main Street. For example, one ACA insured credit sold in the past by FMSBonds, Aurora Health Systems in Wisconsin, is reporting strong earnings and debt service coverage. Aurora, like many ACA insured credits, has a rating on its own. In this case, Aurora has its own BBB+ rating from Standard & Poor’s. Other insured bonds are paying their debt from their own resources as well, without reliance on ACA or any of the other bond insurance providers.

While it is unclear what the future holds for ACA, we do know that the New York State Office of Insurance Regulation is one of the toughest in the country and will make every effort to ensure that the capital resources pledged to support ACA’s municipal book of business will remain in place. 

S&P also lowered the ratings outlook to negative for MBIA, Ambac and XL Capital Assurance Inc., and placed Financial Guaranty Insurance Co.’s “AAA” rating under review for a possible downgrade.

We will continue to provide updates on FMSbonds.com.

12/19/07

About Dr. Abrams