Fitch Downgrades ACA Financial Guaranty to ‘BBB’

May 12, 2004

Fitch Ratings announced that it has downgraded the insurer financial strength (IFS) rating of ACA Financial Guaranty Corp. (ACA) to “BBB” from “A.” The move also affected the credit listings on some 263 companies covered by ACA’s policies, which Fitch listed separately.

Fitch said it has changed the status of ACA’s IFS rating to “Evolving” from “Watch Negative” where it was placed on May 5, 2004 (See IJ Website May 6). The bulletin described ACA as a “niche provider of financial guaranty insurance that insures nearly $8.6 billion of municipal and structured finance obligations as of year-end 2003.”

The rating agency indicated that “the downgrade of ACA’s IFS rating reflects increasing uncertainty with respect to the company’s management changes, capital constraints, and impact of lower ratings on the business model. While the company had signaled its intent to raise common equity through an initial public offering, addressing Fitch’s previously cited concerns (see Feb. 19, 2004 Fitch press release), progress to date has been behind schedule.”

It also noted that “the expected step down of the company’s Chief Executive Officer and the recent departure of its Chief Operating Officer creates additional uncertainty. While currently not expected to affect liquidity and capital positions, there are potential collateral posting requirements stemming from this rating action or other developments that should be monitored.”

Fitch indicated that “a successful management transition and completion of the capital raising initiative could support a higher rating in the future. However, at this time, Fitch does not envision the IFS rating returning to the “A” rating.

The bulletin also noted that “ACA management has requested a withdrawal of the rating. Our decision whether to continue will depend upon the availability of sufficient information to maintain an accurate rating as well as investor interest. “

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