Surprise! ACA has survived the weekend.
The bond insurer, which was last month the first of its ilk to have its top notch credit rating slashed, said late on Sunday that it had convinced its trading partners to give it more time to raise capital and to stabilise its financial position. It now has until midnight on February 19 to avoid reneging on $61bn of credit default swaps contracts, after its rating was cut to CCC by S&P.
It’s another stay of execution for the bond insurer, which was awarded additional time after the December downgrade to find $1.7bn of extra collateral against its CDS contracts. Merrill Lynch last week wrote down $1.9bn related to hedges it had entered into through ACA, the first indication of the potential broader fallout from the monoline’s problems.
ACA must now attempt to unwind its CDS agreements, or come up with a rescue plan and/or capital infusion. The monoline said on Sunday that it continued to work with its counterparties towards a “permanent solution,” the options for which are rapidly being closed off.
But the other dominos have already begun to fall. ACA was on Friday joined in the downgrade camp by fellow monoline Ambac, cut to AA by Fitch after the bond insurer scrapped plans to raise $1bn in new equity to cover its capital shortfall. Moody’s also has Ambac and peer MBIA under review for a downgrade, despite the latter’s $1bn cash haul secured earlier this month. By the end of the week, the markets were pricing in more than a 70 per cent chance of the companies going bust – which managed still to seem a tad optimistic.
Monoline-rendered cracks have also started to appear further afield. Dexia, the Belgian bank which owns Financial Security Assurance, another US bond insurance group, came clean on its exposure to Ambac. The Belgian bank’s shares fell 18 per cent last week as concerns grew over its exposure to the sector, as numerous European banks suffered double-digit falls on the growing concerns.
FSA itself has little exposure to the subprime-related assets that have undone its fellow bond insurers – and as such, reports the FT on Monday, scooped up almost a third of the (much-reduced) bond insuring business on offer so far this month.
Dexia confessed to €5.8bn exposure to assets guaranteed by Ambac, but added that the risk profile of those assets was similar to the bank’s own and that it did not expect a significant impact on credit quality or results. It has no exposure to Ambac CDOs of ABS deals, it added. FSA has sought $1.3bn of reinsurance through Ambac on some of its own transactions, primarily in US healthcare and public finance, and has also provided reinsurance to Ambac on its own transactions, Dexia said. Such deals would generally have met the same underwriting standard as those required for FSA’s own guarantees.
But with counterparty risk front and centre, the week started much as the last had finished. Dexia fell 5.4 per cent in early trade, as Europe’s banks slumped in early trade.