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Wednesday, December 19, 2007


ACA cut to junk

per bloomberg:

MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had the outlook on their AAA credit ratings lowered to negative from stable by Standard & Poor's, while ACA Capital Holdings Inc.'s guaranty ranking was cut to CCC from A.

S&P also reduced its outlook for Financial Guaranty Insurance Co. and XL Capital Assurance Inc. to negative. The actions were ``prompted by worsening expectations'' for insured nonprime residential mortgage bonds and collateralized debt obligations of asset-backed securities, New York-based S&P said in a statement.

``The hits keep coming,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``It's been our view that these guys are in a much more difficult predicament than investors or the companies themselves believed.''

earlier comments on ACA here and here. some of the effect has surely been priced in, and some owners of affected issues have insured again with other insurers. the question is rapidly becoming, however, if any of these insurers will see the other side of this credit event.

in truth, many municipal bond issues would go off just fine without insurance. but there could hardly be a worse time for the backup to fall away, as sub-federal governments of every denomination are facing a falloff in tax collection as economic activity slows. a lot of spending plans will be revised, and some not-insignificant number of issues which were to be serviced by receipts that are no longer there are going to be pressured.

the other, perhaps more important effect will be seen in loss reserving at banks and investment banks. canadian imperial bank of commerce is the first of several who will have to set aside capital reserves to cover risks which were previously insured and therefore not reserved against. this may not happen suddenly -- many banks will be sure to have doubled up their insurance with contracts with other guarantors, in spite of what were probably punitive rates.

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