In recent years, ACA wrote insurance contracts on credit default swaps, some of which had underlying exposure to the U.S. residential mortgage market. These contracts contained ratings triggers that required affiliated companies to post collateral in the event of ACA’s financial strength rating downgrade below A-. If those affiliated companies could not post collateral, a loss under the related insurance policy could be triggered.
Because of the unprecedented melt-down of the sub-prime mortgage market and ACA’s subsequent rating downgrade, the Company became potentially obligated to honor insurance claims far in excess of its claim paying abilities. Since ACA was unable to honor these potential claims, the Company and its insured credit swap counterparties, with the close supervision and ultimate approval by the Maryland Insurance Administration (MIA), sought resolution of this problem. The result was the restructuring agreement approved on August 8, 2008. Please click here to read the MIA Order.
Under the terms of the restructuring agreement, the Company made claim settlement payments to its insured credit swap counterparties and the related insurance contracts were terminated. The Company also issued non-interest bearing surplus notes with 95% issued for the benefit of the swap counterparties. The remaining 5% was issued to Manifold Capital (formerly ACA Capital Holdings, Inc.).
Manifold’s surplus notes are non-voting interests. The surplus notes issued to the swap counterparties were in the form of voting or non-voting interests at each counterparty’s discretion.
In addition, the Company negotiated settlements of certain other obligations. The most significant of those obligations was the settlement of a $100 million medium term note obligation insured by the Company. Under the medium term note restructuring, holders received approximately $47 million and title to certain collateralized debt obligation loan interests in full satisfaction of the claims of the noteholders against the Company. Click to read the press release from Manifold Capital.
Upon the closing of the restructuring transaction, a new Board of Directors was appointed. The Board consists of a minimum of 5 directors, barring temporary vacancies, 4 of which are independent. The remaining Board seat is held by the Company's Chief Executive Officer.
Following the restructuring, the Company is operating as a run-off company, overseeing its remaining portfolio of public finance exposures of approximately $7 billion. This means the Company will not issue any new insurance policies without prior written consent of the MIA. However, the Company continues to guarantee timely payment of principal and interest when due on its remaining portfolio of public finance exposures.
Please click here for ACA’s current portfolio.