Tuesday, July 17, 2007

ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting"

Oh Boy! Read the comments from the company which use their own measure of accounting and the analysts and you know how rotten the market has become. I think it is no coincidence that Bear Stearns is again involved. Needles to say that all 4 analysts have buy ratings on the stock! It gives you a good feeling when companies like ACA are providing insurance for billion of paper, doesnt´t it.....This number is taken from the 2006 annual report (large pdf ) titled "Understanding The Value" making allusions to the "enigma". This pdf could be real fun to revisit when the company runs into further trouble .......

ACA Capital’s Structured Credit business provides credit protection, using credit default swaps, on tranches of credit portfolios. We are primarily a seller of credit protection on tranches where the risk of loss is greater than that of the “AAA” rated level. We will sell credit protection below the “AAA” rated level but only when we see unusually strong value. The credits that underlie the portfolios on which we sell credit protection include corporate bonds and loans and mortgage and asset-backed securities

At the end of 2006, we had $39.4 billion of notional exposure in our Structured Credit business, with over 99% attaching at greater than “AAA” rated levels. ( End of Q1 already over $ 50.2 billion...)

Here is more from Mish on this topic

Das ist wirklich kaum zu fassen. Lest Euch bitte die Kommentare des Unternehmens durch die mal eben eine eigene Art der Buchführung benutzen. Dazu kommen einmal mehr vollkommen nutzlose Analysten die entweder wirklich nicht begreifen was Sie den ganzen Tag analysieren oder ..... Das verkneife ich mir lieber :-) Es ist sicher auch kein Zusfall das Bear Sterns erneut involviert ist. Überflüssig zu erwähnen das alle 4 Analysten Kaufempfehlungen haben. Zudem gibt einem das ganze doch gleich ein gutes Gefühle wenn Firmen wie ACA Mrd. von Papiern "versichern". Der o.g. Jahresbericht könnte in der Rückbetrachtung wenn ACA komplett implodiert ist recht lustig werden. Titel ist "Understanding The Value" und macht Anspielungen auf die Enigma....

By its own measures, everything looks good at ACA Capital Holdings, a financial management and insurance company. But other numbers do not look so good, and the stock price is falling rapidly. The company will not comment on what is going on.

In New York Stock Exchange trading yesterday, ACA shares fell 22 percent, dropping $1.87, to $6.59, on the heaviest volume in the company’s brief history. The shares have lost a third of their value since Thursday, and are trading at less than half of their value a month ago.

ACA has written billions of dollars worth of insurance on the value of financial assets, and it manages collateralized debt obligations, or C.D.O.’s — investment vehicles that invest in bonds backed by risky mortgages and other debt — on billions more. Some of the C.D.O.’s it manages for others were mentioned by bond rating agencies last week as candidates for downgrading.
But it is not clear how much pain ACA could suffer from the subprime market. In detailing its exposure to subprime mortgage loans on its Web site last week, the company said that nearly all of its direct exposure to subprime mortgage debt came through securities rated AAA by at least one bond rating agency. Such securities have generally held their value even as others have plunged in market value amid turmoil in the subprime market.
> "generally hold their value" ..... this comment is almost criminal

> der Kommentar das die AAA Papiere ihren Wert gehalten haben ist schon fast kriminell

Late yesterday, Standard & Poor’s, the rating agency, said it was considering lowering ratings on various securities issued by 19 C.D.O.’s, including 4 managed, though not owned, by ACA. The agency said the moves “reflect the increased probability of default” of underlying mortgages.

Until last month, ACA’s assurances had satisfied investors, although the stock suffered briefly on May 10, when it reported first-quarter earnings. Under normal accounting rules, those results showed that profits were down sharply, and that book value had plunged because of declines in market value of some assets.

But the stock quickly recovered to above $14 a share after the company pointed to its own adjusted measures of earnings, which showed rapid increases in both profits and book value.

In June, the shares began to slide again after the company said that insiders, primarily private equity firms that owned the company before it went public last November, wanted to sell 3.9 million shares, more than a tenth of the shares outstanding.

The proposed offering by insiders was quickly withdrawn after the stock came under pressure, but the selling intensified last week.

The company’s largest shareholder, with a 27.6 percent stake, is a fund managed by Bear Stearns Merchant Banking, an affiliate of the Bear Stearns Companies, whose own shares fell $2.58 yesterday, to $140.31. Last month, Bear Stearns was forced to bail out a hedge fund it managed that had suffered losses in subprime mortgage securities.

After ACA disclosed the extent of its subprime exposure last week, Craig Siegenthaler, an analyst at Credit Suisse, said the disclosure increased the risk profile for ACA, and reduced his price target on the stock to $12, from $17.

In a report yesterday morning, Geoffrey Dunn, an analyst at Keefe, Bruyette & Woods, reduced his earnings forecast, saying that ACA’s price had fallen because it “has no real comparable peers in the publicly traded markets, is very complex and seems to operate in areas that are at the heart of the market’s current concerns.”

But, Mr. Dunn said in an interview, “in our worst-case scenario, we think the stock has a double-digit valuation.” He said the price decline was not caused by “fundamentally legitimate concerns.” > What is this guy smoking? Worst case scenario and still double digit?

Under generally accepted accounting principles, ACA was required to take a loss for the fall in value of some derivative securities it owned, and to reduce its book value for the decline in other securities. A result was that profits were down 17 percent from a year earlier, although the company still reported profits of $11.4 million, or 31 cents a share. Its book value fell to $11.62 a share, from $13.96 at the end of 2006.

But ACA told investors that those numbers were misleading, and its chief executive, Alan S. Roseman, said the results “underscore our ability to produce significant growth throughout changing market conditions.”

Thanks to Randy Glasbergen

Mr. Roseman said that ACA’s preferred measurements of income, called net economic income and base economic income, were each up 41 percent from a year earlier. That was largely because those measurements ignored losses in derivative securities owned by the company. Assuming, as the company does, that those derivatives return to original value, there will be no long-term losses, the company explained.

In computing its adjusted book value, the company not only excludes those derivative losses but also adds in the value of future fees it will collect for managing C.D.O. portfolios. By that measure, adjusted book value rose to $24.91 a share, from $22.93.

ACA’s competitors in insuring C.D.O. values generally have AAA ratings from the rating agencies. But ACA has only an A rating
, indicating a financial position that is less solid, although still good. In affirming that rating in June, Standard & Poor’s said ACA had insured $10.3 billion in C.D.O.’s that invested heavily in subprime mortgage bonds. While that made up nearly a quarter of all bonds insured by the company, S.& P. said that the bonds ACA insured were themselves rated AAA.

>Thank God for the always up to date rating agencies and the prudent due dilligence from buyers of this safe securities.....

> Gott sei Dank haben wir ja die stets aufmerksamen Wächter der Bonität und eine genaue Prüfung der Käufer der mit AAA besucherten Papiere..........

More from Bloomberg
ACA's statement showed that for $6.1 billion of ACA's contracts, the company would start taking losses even before all of the low-rated subprime-mortgage bonds from 2006 and 2007 defaulted

For another $2.8 billion of contracts linked to higher- rated debt, the company may lose money before all the derivatives on CDO securities within them defaulted. Analysts such as ones at Wachovia Corp. say among ``high grade'' CDOs, those made up of many CDOs may face the most losses. ACA also had $444 million in exposure to a CDO containing only CDO bonds, compared with $911 million of adjusted book value, Credit Suisse analysts said.

>If someone knows more about this company and has some insights about the insurance business please leave a comment. I still having problems how it is possible to insure tens on billion with equity under 500 mio and still get an AAA rating. I was a long time shareholder from Depfa (German stock) that is also involved in the financial guaranteed business. But they only provide the guarantee on state backed underlyings / public sector finance. Quite a difference to what ACA is doing.... I hope that i´m missing a point here...Otherwise this is even worse than i could have imagined it.....

>Wenn einer von Euch mehr Hintergrundinformationen hat wie es möglich sein kann das eine kleine Klitsche mit unter 500 mio an Kaiptal bei etlichen Mrd an Papieren als AAA Versicherer auftauchen kann laßt es mich wissen. Kenne hier als langjähriger Depfa Aktionär die gleiche Konstruktion mit dem Unterschied das die ausschließlich staatliche Underlyings garatnteirt haben. Ein nicht ganz zu unterschätzender Unterschied.......

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Blogger jmf said...

Q+A with management
(2 page pdf)

Still not convinced and confused

6:46 AM  
Blogger jmf said...

The attached table provides detailed information on each of ACA Capital’s Structured Credit transactions with material exposure to residential mortgage-backed securities (“RMBS”).

The table provides details
including: transaction size, attachment and detachment points, attachment point as it relates to a “AAA” level of risk (at execution), and the underlying portfolio composition including subprime RMBS concentration and vintage.

􀂃 Note several important points in relation to the attached table:
􀂃 99.6% of the exposure is rated “AAA” by one or both of Moody’s and Standard & Poor’s (some of which are private ratings)
• The remaining 0.4% consists of two “AA” transactions and one “A” transaction
􀂃 100% of the transactions with material 2006 vintage mezzanine subprime RMBS risk have
attachment points no less than 1.3x the “AAA” start

The table

The only problem is that we all know that the AAA rating from the sleeping agencies are worth.....

7:29 AM  
Blogger jmf said...


Stock "only" up 18%....

8:22 AM  
Blogger jmf said...

from 24/7 Wall Street

ACA Capital: Deep Value Stock OR Serious Viability Risk

8:41 AM  
Blogger jmf said...

Credit Suisse cuts ACA Capital to neutral from outperform

I think they will cut at 2$ to sell :-)

6:11 AM  
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