Despite the management changes and subsequent ratings uncertainty surrounding financial guarantor ACA Financial Guaranty, levels on the CDO asset manager's outstanding CDOs held firm throughout last week by some accounts, and gapped out by others. Regardless, in the face of losing two of its top executives - which puts pressure on its planned IPO - the company is forging ahead with its upcoming CDO, market sources said.

Whether it gets done is a matter of debate.

"In relation to asset performance, ACA's CDOs are not directly affected by the downgrade (of ACA's insurance operations)," said Fitch Ratings analyst Nathan Flanders. "But there is a risk to ACA as essentially servicer of the assets," Flanders added.

On Tuesday, Fitch Ratings downgraded ACA's insurer financial strength rating to BBB' from A' and downgraded 263 ACA insured municipal bond transactions. Fitch also placed ACA's ratings on watch evolving,' pending the replacement of key management personnel and the success of the IPO. ACA responded by demanding Fitch withdraw its rating.

Standard & Poor's has maintained its A' rating, but placed its ratings on CreditWatch with negative implications on May 5, and subsequently placed all ACA-guaranteed CDO classes on watch.

As collateral manager, ACA wraps several natural triple-B classes and some equity as well, buyside sources said. Some speculated that the downgrade and ratings watch may increase ACA's cost of funding. Some also speculated that insurance company accounts holding ACA wrapped CDO classes or equity may become forced sellers.

"Systemically, this hints at a much bigger problem," one investor said. "The fear is what's behind the curtain; was it departing management's view that the company may not be viable?"

To date, ACA has sold, and is currently acting as collateral manager on three CDOs, totaling roughly $1.5 billion. The firm is currently in the marketing stages of pricing a $400 million series 2004-1 deal, via Merrill Lynch.

"The outstanding transactions are performing as clean as they were at new issue," said a syndicate official at one lead manager. "There has been no migration of WARF or tenor of the underlying assets."

"The news is not a reflection of the company's investments or its CDOs at all," another investor said. "If bonds are cheap on this news, they would be a nice opportunity."

Ironically, the same day as Fitch downgraded ACA's insurance rating, the debt tracker released a presale report for the current deal. A source at Merrill Lynch declined to comment on a Rule 144A transaction prior to pricing.

Meanwhile, the company hopes to raise $125 million in an IPO, which is to be led by JPMorgan Securities. Former Chief Execute Michael Satz cited personal reasons for his departure, while Chief Operating Officer and collateral manager Maryram Muessel's departure was attributed to the expiration of her employment contract.

"Fitch's concern is over the loss of key management and a cash shortfall in relation to its guaranteed municipal debt," Fitch's Flanders added. "In some ways, they are a victim of their own success - growing rapidly without maintaining reserves. The IPO, if completed, will go a long way to alleviate our concerns."

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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