ACA BONDS STILL ATTRACTIVE DESPITE ACTION BY FITCH
Fitch has placed ACA on Rating Watch Negative because ACA has failed
to raise the additional capital necessary to allow it to do new
business.
Following the lead of S&P, Fitch announced it will downgrade
ACA's rating if the necessary capital is not raised before February
1.
Byron Klapper, a spokesman for ACA, has reiterated that he expects
the necessary capital to be raised by the end of January.
A downgrade of ACA would likely preclude the insurer from increasing
its book of business. Although ACA previously stated its intention
to access additional capital by the end of January, the rating agency
felt that the passage of time had made it appear less likely that
ACA would be successful in obtaining the required funding.
We expect this news to negatively impact the market value of these
bonds, which we continue to believe will create a unique opportunity
for investors.
Earlier this month, S&P said that if ACA did not raise $45
million in additional capital, its rating could be lowered to below
investment grade, making it impossible for ACA to insure new bonds.
In March 2000, ACA announced that it was seeking additional capital
sources when ACA Capital Re Bermuda opted not to renew its $75 million
reinsurance agreement with ACA. This capital has since been replaced
and ACA has also raised $15 million of new hard capital from its
original investors as well as $1.5 million from its employees. Bank
of America Securities has been hired by ACA to assist in raising
the additional $45 million.
"This action by Fitch relates only to the ongoing pursuit of new
capital investment to maintain the long-term stability of its rating.
The rating alert does not reflect any concerns by the rating agency
as to the credit quality of the company's insured portfolio, the
adequacy of its statutory capital or the professionalism of its
operations," ACA stated in its press release.
The most significant challenge ACA bonds will face, if the rating
is lowered below investment grade, would be in the initial trading
of secondary market issues.
Some institutional investors would be forced to liquidate their
ACA holdings since they are limited to bonds with investment grade
ratings. This should cause a disproportionate drop in the price
of these securities.
We think that institutional bondholders will throw the baby out
with the bath water. This should allow investors, who do their homework,
to purchase ACA bonds with strong underlying credits at a significant
discount to their intrinsic value.
Here's why:
Until this situation is resolved, ACA bonds will be available at
yields that can be over 100 basis points higher than yields on comparable
bonds.
The negative S&P and Fitch reports do not relate to the company's
ability to pay claims on its portfolio of insured bonds (S&P
acknowledges that "the credit profile of ACA's book of business
remains acceptable.")
The majority of ACA's portfolio of insured debt is of investment-grade
quality. Most ACA issues possess a level of credit quality that
allows the bonds to stand on their own merit, without the insurance
enhancement.
ACA issues have been managed by many of the largest, most respected
Wall Street firms, giving them a vested interest in the success
of these projects.
We believe, at the end of the day, many of the bonds issued with
ACA insurance will have provided the same opportunities for investors
as our past recommendations of Denver Airport and Philadelphia General
Obligation bonds, when they were also being shunned by institutional
investors.
Contact us today for further information.
02/01/01
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