ACE Guaranty's Assured Guaranty received some bad news last week, when Moody's Investors Service upgraded its Insurance Financial Strength rating to Aa1' - one notch below the triple-A rating it coveted - from Aa2'. In its announcement, Moody's cited the company's push into the increasingly competitive primary financial guaranty business and the challenges it anticipates ACE will face implementing its strategy, given a limited track record as a top-tier monoline insurer.

ACE's insurance operations are rated triple-A by Standard & Poor's. ACE plans to maintain the business plan outlined in its prospectus and eventually achieve the desired Aaa' rating.

"The ultimate goal is to achieve the double, triple-A rating," said company spokeswoman Barbara Van Hassel. Van Hassel added that she was not sure if ACE would seek out Fitch Ratings to achieve its double triple-A goal.

Moody's did say in its announcement, however, that ACE's rating may be raised, should it be successful building "a defensible franchise as a primary financial guarantor. Moody's cited the currently tight spread environment in the ABS market as adding to the challenges. Moody's says the "mature U.S. market and tight credit spreads could hurt demand for credit enhancement."

Moody's also showed concern over the exposures that ACE built up in its previous business strategy - monoline reinsurance and wrapping credit default swaps. Aside from its CDS exposure, Moody's made reference to "risk concentration in volatile sectors," including CDOs, healthcare and aircraft ABS.

In the meantime, ACE is staying the course laid out in the prospectus for its April 2004 initial public offering. Van Hassel confirmed that ACE "still plans to wrap primary ABS" and that the company is currently "starting to work on different deals."

Competition in the monoline surety business has heated up in recent years, with numerous new entrants, as well as a recommitment to the business by others. In recent years, the primary guarantor market has gained XLCA and CIFG, while FGIC, sold by previous parent G.E. Capital, poached senior management from rival Ambac. FGIC was the leading guarantor in the first quarter.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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