ACA restructuring gets approval

Company to settle riskiest obligations

August 09, 2008|By Tricia Bishop | Tricia Bishop,Sun reporter

The Maryland Insurance Commission said yesterday that it approved a restructuring plan for troubled bond insurer ACA Financial Guaranty Corp. after months of regulatory review and oversight, which was triggered by the company's involvement in the subprime mortgage market.

The plan calls for ACA, which is incorporated in Maryland but based in New York, to settle its riskier obligations and focus solely on the municipal bonds it has already insured, paying all claims and administrative expenses until the last commitment matures in 2045.

The new business model turns ACA into a "runoff company," which means it won't issue new policies but will maintain the existing ones through their expiration dates.

ACA, a subsidiary of ACA Capital Holdings Inc., also terminated $65 billion in credit-default swap contracts and turned over most of the company to creditors. Counterparties now own a 95 percent residual interest in the unit through surplus notes, the company said in a statement.

Credit-default swaps, conceived to protect creditors against default, are used to speculate on corporate creditworthiness or to hedge against losses.

"A great deal of effort and due diligence went into this arrangement on all parts, and I am satisfied that the outcome was worth it," Insurance Commissioner Ralph S. Tyler said in a statement.

ACA, once part of Baltimore's USF&G Financial, said in a statement that it was "pleased" with the resolution and "believes it is for the mutual benefit of all its policyholders."

Since its incorporation in 1986, ACA's main business was insuring the relatively safe bonds issued by municipalities. But in 2002, it began guaranteeing riskier securities, including about $22 billion in transactions backed by subprime mortgages.

After that industry collapsed because of mortgage defaults, Standard & Poor's significantly downgraded ACA's credit rating in December. That consequently cut ratings on more than $6 billion worth of municipal bonds issued throughout the country to pay for everything from prisons to parks.

That, in turn, led the state's insurance regulators to step in and initiate a "significantly increased level of oversight" designed to end in a settlement, according to the Aug. 7 order approving the restructuring plan.

Tyler said the reorganization ensures that municipal obligations insured by ACA are protected. Local governments often have higher credit ratings because their bonds are insured, which allows them to borrow at lower rates. Without that insurance, municipalities would have to pay more to borrow and likely pass the cost on to consumers through property taxes.

"I feel that all the parties involved have made the best of a difficult situation," Tyler said.

tricia.bishop@baltsun.com

Bloomberg News contributed to this article.

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