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NEW YORK-A new financial guarantee insurer that plans to confer an A rating on the lower-rated municipal bonds it insures is rated as having a good chance for success.
Traditionally, financial guarantee insurers confer their AAA ratings on the bonds they insure. Newly formed American Capital Access Corp., which has initial capital of about $117 million, would be the first to confer a single A rating.
The New York-based insurer, which opened its doors last week, plans to insure transactions in the municipal, asset-backed, special surety and international markets and will focus on issues that are unrated or have underlying ratings of A- or lower, according to Fitch Investors Service, which has given ACA an A rating.
A spokesman for ACA could not be reached for comment.
ACA is headed by H. Russell Fraser, who recently retired as Fitch's chairman and formerly was president and chief executive officer of AMBAC Indemnity Corp. ACA management also includes former officials of MBIA Insurance Corp. and Connie Lee Insurance Co., as well as broker Johnson & Higgins.
The outlook for ACA is good, in part because it addresses an unfilled market niche and in part because of its experienced management, observers say.
"I think it has a good possibility for success," said Brady Tournillon, a financial analyst with Fitch. "They're looking to serve an underserved market."
Andrew Jones, group vp at Duff & Phelps Credit Rating Co. in New York, said: "I think that they are looking at a broader market of potentially insurable credits. They're not under constraints that are as stringent as for an AAA-rated guarantor, and there is a market in securities that are rated in the single A range, so I think that they have carved out a very practical niche in the marketplace."
"I think the entrance of ACA in the marketplace creates opportunities," added Mr. Jones. "It could lead to a tiering of structures, because ACA can bring some non-investment grade credits up to single A, and perhaps other guarantors could in turn take those credits up to AAA."
Bob Green, director at rating agency Standard & Poor's Corp. in New York, said, "We think there's a reasonable expectation that this company will write sufficient volume to generate the kind of return that its investors are looking for."
Louise Costikyan, an analyst with Merrill Lynch & Co. in New York, said, "It is a company with an idea in search of a market, and I think there are a number of questions but, overall, I think it's a very interesting idea, and possibly more interesting from the asset-backed side than the municipal side."
"They're trying to serve the only niche that's in the municipal marketplace that's not covered by existing insurers," said Richard A. Ciccarone, senior vp and co-head of municipal investments at Oak Brook, Ill.-based Van Kempen American Capital.
Mr. Ciccarone said he thinks it will appeal primarily to retail investors satisfied with an A rating and the higher yield it provides.
However, Anne Ross, vp and director of research at Roosevelt & Cross, said, "I don't know if there's going to be a large enough market to build the market share that will build enough premium to offset the risk.*.*.time will tell."
ACA's investors include Insurance Partners L.P., Stephens Group Inc., GCC Investments Inc., AEGON USA and Third Avenue Value Fund Inc. It also has a $50 million contingent capital commitment from Zurich Reinsurance (North America) Inc. and a $75 million excess-of-loss reinsurance agreement with Capital Reinsurance Co.