Like a spreading cancer causing havoc on the world's economy, the subprime meltdown has found its next victim: bond insurers. Credit rating agency Standard & Poor's downgraded on Wednesday its rating on ACA Financial Guaranty Corp. three notches to CCC from an investment grade 'A' rating. The downgrade could force Merrill Lynch & Co. , the Canadian Imperial Bank of Commerce and several other investment banks to write down the value of securities they had bought insurance on by billions of dollars.
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With guaranteeing about $26 billion in mortgage-related debt, the implications of a credit downgrade for ACA are also great. ACA would have to pay more money in borrowing costs. In addition, the insurer would have to put up more collateral — which it says it doesn't have — if its debt rating falls below an "A" rating because of guidelines within its debt insurance, credit default swaps and contracts.
S&P describes on its Web site a company with a CCC rating as "currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation." The rating agency is forecasting ACA could be hit with losses totaling more than $2.85 billion. The company has a capital cushion that could absorb losses of up to $650 million. — Gerald Magpily
See New York Times article
See Forbes article
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