AP
S&P Downgrades ACA to Junk Status
Wednesday December 19, 12:43 pm ET
By Stephen Bernard, AP Business Writer
S&P Downgrades ACA Financial to Non-Investment Grade "CCC" Rating From Investment Grade "A"
NEW YORK (AP) -- A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A."
Wall Street banks and city governments rely on bond insurance to make it cheaper to borrow money. Carrying insurance on new debt typically leads to higher credit ratings, making interest payments on the debt smaller. The bond insurer acts as a safeguard, making principal and interest payments if the bond issuer fails to make payments.
The downgrade of ACA will essentially not allow it to continue insuring bonds, since most people will not buy insurance on bonds from a firm that does not have top-quality ratings.
As defaults among loans have risen -- especially among subprime mortgages given to customers with poor credit history -- rating agencies began reviewing how those defaults could affect bond insurers. Many securities and bonds are backed by pools of the defaulting loans, meaning defaults among the bonds and securities are more likely.
If those bonds and securities default, it would trigger payments by the insurer. If too many defaults occur, bond insurers might not have enough cash to make those payments.
Downgrades of bond insurers can also lead to losses at the companies who use them. Only minutes after S&P's downgrade of ACA, Canadian financial services firm CIBC World Markets said insurance for $3.5 billion in securities backed by subprime mortgages it holds may no longer be viable.
"It is not known whether ACA will continue as a viable counterparty to CIBC," the Canadian firm said.
CIBC said there is a "reasonably high probability" it will take a large charge for the period ending Jan. 31.
As part of a mass review of the bond insurers, S&P also placed Financial Guaranty Insurance Co. on negative credit watch. FGIC currently carries a "AAA" rating. A negative watch means there is a one-in-two chance the rating could be downgraded in the next three months.
Ambac Financial Group Inc., MBIA Insurance Corp. and XL Capital Assurance Inc. were all placed on a negative outlook by S&P, though their ratings remained unchanged. A negative outlook means there is a one-in-three chance ratings will be cut in the next two years.
AP Business Writer Jeremy Herron contributed to this report from New York.
http://biz.yahoo.com/ap/071219/bond_insurers_ratings.html
S&P Downgrades ACA to Junk Status
Wednesday December 19, 12:43 pm ET
By Stephen Bernard, AP Business Writer
S&P Downgrades ACA Financial to Non-Investment Grade "CCC" Rating From Investment Grade "A"
NEW YORK (AP) -- A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A."
Wall Street banks and city governments rely on bond insurance to make it cheaper to borrow money. Carrying insurance on new debt typically leads to higher credit ratings, making interest payments on the debt smaller. The bond insurer acts as a safeguard, making principal and interest payments if the bond issuer fails to make payments.
The downgrade of ACA will essentially not allow it to continue insuring bonds, since most people will not buy insurance on bonds from a firm that does not have top-quality ratings.
As defaults among loans have risen -- especially among subprime mortgages given to customers with poor credit history -- rating agencies began reviewing how those defaults could affect bond insurers. Many securities and bonds are backed by pools of the defaulting loans, meaning defaults among the bonds and securities are more likely.
If those bonds and securities default, it would trigger payments by the insurer. If too many defaults occur, bond insurers might not have enough cash to make those payments.
Downgrades of bond insurers can also lead to losses at the companies who use them. Only minutes after S&P's downgrade of ACA, Canadian financial services firm CIBC World Markets said insurance for $3.5 billion in securities backed by subprime mortgages it holds may no longer be viable.
"It is not known whether ACA will continue as a viable counterparty to CIBC," the Canadian firm said.
CIBC said there is a "reasonably high probability" it will take a large charge for the period ending Jan. 31.
As part of a mass review of the bond insurers, S&P also placed Financial Guaranty Insurance Co. on negative credit watch. FGIC currently carries a "AAA" rating. A negative watch means there is a one-in-two chance the rating could be downgraded in the next three months.
Ambac Financial Group Inc., MBIA Insurance Corp. and XL Capital Assurance Inc. were all placed on a negative outlook by S&P, though their ratings remained unchanged. A negative outlook means there is a one-in-three chance ratings will be cut in the next two years.
AP Business Writer Jeremy Herron contributed to this report from New York.
http://biz.yahoo.com/ap/071219/bond_insurers_ratings.html