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
You have to ask what took so long for S&P to downgrade ACA to junk. The slide was obvious from a stock price perspective back in July. http://finance.yahoo.com/q/bc?s=ACAH.PK&t=1y S&P had to wait till the stock dropped to a mere 45 cents to figure out that this bond insurer should be rated as junk instead of top-end investment grade. Once again it appears that the rating system is a joke. - Greg
your so right its not even funny. it will take forever to mbia to get downgraded. if you study them you can see what kind of mess they are in. they insured munis setting aside 3bps of reserves. then they started to insure CDOs(with rmbs on it) setting aside 4bps of reserves, their business model is a failure and only a government bailout can save them, yet the fees the rating agencies make off these guys will guarantee they will hold their ratings for as a long their even a remote hope of 'raising capital' and the ceos will keeping chanting garbage on how things look good and their are confident the outlook for the future 'cant be any better,mark to market losses dont count' meanwhile they will be trading on the pink sheets with a market cap lower than wcom, yet rated AAA.you just cant make this stuff up
I have posted the following many times, but it bears repeating for this thread. The ratings agencies are.............. !!!!IN BED WITH THE STREET AND CORPORATE AMERICA!!!! Question #1: Scenario: Analyst "Creditboy" at S&P sees a s%$storm brewing for Company XYZ he covers. Thinks the company will deteriorate over the next 24-36 months. Tells his boss he is about to downgrade XYZ, sees trouble on the horizon. Boss then asks Creditboy "Son, how do we generate revenue at S&P"? Answer # 1: Boss: "By charging fees to companies to rate their creditworthiness via debt issuance. If you downgrade XYZ right now, they'll drop us as a rating agency on their debt, and we lose our yearly vig to rate them. Now you wouldn't want to be responsible for a 6 figure loss of revenue for the firm, would you? You're up for review next month you know. S#&%can that report, and rethink your analysis. I think you might come to a different conclusion." Question #2: Gee, isn't that called a massive conflict of interest? I mean, let's follow the logic.....those firms are PAYING to be rated.....and the ratings agencies make their money through their fees......so if the rating agencies customers decide to drop the rating service, the agencies lose their yearly fee, their source of revenue.......so how do ratings agencies remain unbiased and objective in rating companies that they are beholden to for their yearly fee? Answer #2: THEY DON'T Its a charade, plain and simple. In good times, nobody bats an eye. But in bad times, the ratings agencies are the epitome of Monday morning quarterbacks. They will downgrade a company after they have shut their doors and told the world they are bankrupt. But the agencies will NEVER tell you this is coming down the pike.....because they won't be able to collect their yearly fee if they spoil the party. Question # 3: Why does this sound familiar? Answer # 3: Oh, that's right.....the "invisible wall" between research departments and proprietary trading & investment bankers at every Wall Street IB/BD Ok, that's my rant for the night