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.
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.
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