ACA announced it has received a $120 million equity investment, strengthening its capital base considerably. The investment decision by Bear Stearns Merchant Banking will make it ACA’s largest shareholder.
Existing institutional investors had already contributed approximately $28 million of new equity capital in order to meet Standard & Poor’s requirement to maintain ACA’s “A” rating. The Bear Stearns investment is slated to close during the third quarter of this year, pending regulatory approval by New York State, at which time the “A” financial strength rating will be affirmed.
ACA, which insures lower investment grade municipal bonds at the “A” level, has sought to provide credit enhancement for smaller or infrequent issuers with positive credit characteristics. Larger insurers are most interested in standard industry “names,” whose repeat business they can count on.
ACA’s portfolio of insured bonds is carefully monitored by S&P and must meet criteria for diversification by sector, credit quality, and geographical distribution, as well as other standards. ACA also closely watches the performance of its portfolio over time and, as a condition of insurance, can intervene to correct a weakening credit situation.
The newly announced equity infusion allows ACA to exceed the statutory capital requirement, set by S&P to maintain its financial strength rating. Although ACA was placed on CreditWatch with negative implications in May 2004, the company has been profitable and its portfolio has performed as expected. As we noted back in May 2004, S&P at the time maintained its “A” rating of the company.
The higher capital levels and lower risk profile favored by ACA’s new management should provide a stable base for the company’s long-term prospects.