ACA downgrade gets market buzzing; Kettering Medical $188.15 million bonds to price in early 2008

By Cristal Cody and Sheri Kasprzak

New York, Dec. 21 - As the muni market wound down ahead of the Christmas holiday, activity slowed to a crawl - but the holiday season may not be very festive for bond insurer ACA Capital Holdings Inc.

The insurance company was slashed to junk earlier this week by Standard & Poor's, which crept in like the Grinch and replaced its A rating with a CCC.

On Wednesday, S&P said it was downgrading ACA because of expected massive mortgage-related losses. S&P said ACA's losses could exceed its cushion by more than $2 billion.

According to one muni trader Friday, ACA probably won't be able to handle too much before filing for bankruptcy because the company doesn't have much liquidity.

In fact, all eyes seem to be on ACA, a trader said Friday.

ACA said it has entered into forbearance agreement with its structured credit and other counterparties effective until Jan. 18. The agreement stays a requirement to post more than $1.5 billion in collateral to cover losses if the company falls below an A rating.

"So what you're seeing is a lot of people trying to get a handle on what the ACA municipal bonds are worth," the trader said. "It comes down to underlying credit. Their financial situation wouldn't be able to handle too much before they have to file for Chapter 11."

ACA Capital said in a statement Thursday that it was "surprised by the magnitude of the downgrade given that all of its structured credit exposures that were originally rated AAA are all still rated AAA by S&P."

Otherwise, the market is expected to show little activity for the holiday week.

"It will be sparsely attended and sparse activity," a bond broker said.

Kettering Medical bonds to price

Even though market sources agreed Friday that activity will likely be incredibly slow over the holiday period, action does seem set to pick up in early 2008.

Kettering Medical Center Network in Montgomery County, Ohio, reportedly intends to price $188.15 million in two series of bonds. The bonds are set to price Jan. 17.

The issue includes $93.575 million in series 2008A variable-rate demand obligation healthcare revenue bonds and $94.575 million in series 2008B variable-rate demand obligation healthcare bonds. Both series of bonds are rated A2 by Moody's Investors Service.

Financial Security Assurance is the insurer.

Proceeds, according to a statement released Friday by Moody's, will be used to refund the outstanding principal on the network's series 2002 bonds and series 2006B bonds issued through Montgomery County. The proceeds will also be used to refund the outstanding principal on series 2003 D-1 bonds issued through Clinton County, Ohio and to finance and refinance the acquisition, construction, installation and equipment of hospital facilities, as well as to construct and equip an ambulatory surgery center.

Merrill Lynch & Co. is the lead manager for the offering.

Activity expected to be light

Looking ahead, market insiders said the Christmas holiday will likely cripple new-issue action. No major offerings are set for pricing in the Christmas week, sources said, but they remained optimistic about activity once the calendar turns over to 2008.

"I'm seeing very, very little coming up," said one sell-side market source. "Lots of people are leaving early today too so it's just been really slow."

Another sell-sider noted that even though things are slow now, activity is poised to improve early in 2008.

"Lots of stuff coming up next year," he said. "Not a lot of stuff this week. No one is around."

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