ACA STAGGERS, BUT UNDERLYING CREDITS OK

American Capital Access (ACA), which saw its Standard & Poor’s rating drop from “A” to “CCC” last week, has indicated in an SEC filing that it remains in compliance with insurance regulatory requirements put in place since its stock offering in 2006. As a result, regulators in Maryland, where ACA is domiciled, are not seeking delinquency measures against ACA.

The rating downgrade, below the “A-“ threshold required by creditors, would have triggered the need for ACA to post collateral against its exposure to the subprime market due to insuring Collateralized Debt Obligations (CDOs). Although its exposure is 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 statement. S&P concluded 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 interest and principal when due.

Investors can take solace in the fact that the current problems affecting Wall Street and the bond insurers do not necessarily affect Main Street. For example, one ACA insured credit, Aurora Health Systems in Wisconsin, recently reported strong earnings and debt service coverage. Aurora, like many ACA insured credits, has an underlying rating of its own. Most insured bonds are paying their debt service from their own resources, without reliance on ACA or any of the other insurance providers 

ACA’s future is unclear. It is currently seeking new capital to meet the requirements of both its creditors and regulators. During this period, ACA has entered into a Consent Order and Agreement with the Maryland Insurance Administration to provide documentation and reports. ACA has also agreed to provide Maryland regulators with the opportunity to object to material transactions, including the payment of dividends or disposal of assets.  

Since ACA has arranged a forbearance agreement with its creditors until mid-January, the Maryland Insurance Administration has agreed, for now, not to institute delinquency proceedings. Similarly, the forbearance agreement allows ACA time to line up potential new financing without having its creditors require the posting of collateral against “mark to market” losses it recorded as a result of its exposure to CDOs. 

We expect the Maryland Insurance Administration to make every effort to ensure that ACA’s capital resources remain in place to support ACA’s insurance policies.

12/27/07

About Dr. Abrams