THERE IS A SILVER LINING IN THE CLOUD OVER ACA
FMSbonds.com has earned its reputation by identifying municipal
bonds that possess solid fundamentals, but are selling at a discount
to their intrinsic value. The usual culprit is investor overreaction
to negative publicity.
Eventually fundamentals carry the day, resulting in better than
market returns for our investors. We are currently monitoring another
situation which we feel represents exceptional value in today's
market.
ACA Financial Guaranty is a financial insurance company whose
issues have been managed by many of the largest, strongest and most
respected Wall Street firms. Last week, Standard & Poorâs placed
ACA on "negative credit watch," stating that ACA's capitalization
levels were below those required for a single-A rated insurer.
This was not a new story. The company previously announced that
it intended to raise $45 million in additional capital. What is
new is the S & P deadline of February 1, 2001 to raise this
new capital or face a rating downgrade.
Michael Satz, president of ACA, said it was an unfortunate episode
for the company, but would not be detrimental to its future success.
He announced that ACA had already hired Bank of America Securities
to help it raise the $45 million in equity to bolster its hard capital
base, which would be the final step in the company's three-step
capitalization plan. Its previous actions were successfully completed
earlier this year.
FMSbonds.com Recommendation
S & Ps announcement has negatively effected the market value
of these bonds, but at the same time it has created an unusual opportunity
for bond investors. Consider the following:
- Until this situation is resolved, investors can purchase ACA
bonds at yields that are considerably higher than yields on other
similarly secured bonds - as much as 100 basis points higher.
- The negative S & P report is not related to the company's
ability to pay claims on its portfolio of insured bonds. In fact,
S & P acknowledged that "the credit profile of ACA's book
of business remains acceptable."
- Approximately 70% of ACA's portfolio of insured debt is investment
grade or better.
Caveats
Investors must be aware that market conditions for these securities
could be volatile and these bonds should not be purchased as a trading
vehicle.
If ACA is downgraded, many institutions will be required by law
to sell these securities, which could keep the market for these
bonds under pressure for some time.
These bonds should be purchased by "buy and hold" investors only.
We will continue to keep you informed of any developments regarding
this situation.
1/15/2001
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