July 16 (Bloomberg) -- ACA Capital Holdings Inc. shares had the biggest drop since the seller of credit derivatives went public in November, after the company disclosed that it could lose money on contracts tied to $4.5 billion of subprime mortgage securities from 2006 and 2007.

The shares fell $1.87, or 22 percent, to $6.59 in New York Stock Exchange composite trading, taking the stock's drop to 33 percent since July 12, when New York-based ACA disclosed the information on its Web site.

While ACA won't necessarily lose money on the bets, ``delinquencies will trend higher,'' Credit Suisse Group analysts Craig Siegenthaler and Thomas Gallagher said in a July 13 report. As rates on the loans adjust higher, bond defaults may rise enough to hurt ACA, said the Credit Suisse analysts, who maintained a ``market weight'' rating on the stock and an $11 price target.

ACA's release was similar to disclosures the company regularly makes, said Fred Bratman, a spokesman for the company at Hyde Park Financial Communications. ``This is information they choose to put out because they're very transparent in their business,'' Bratman said.

Exchange Questions

The New York Stock Exchange today requested that the company issue a public statement indicating whether there are any corporate developments to explain the stock moves. The company said its policy is not to comment on unusual market activity, according to an e-mailed statement from the stock exchange. Bratman wouldn't comment on the stock decline.

A $1.5 billion private-equity fund run by New York-based Bear Stearns Cos. owned 27 percent of ACA as of November, according to Bloomberg data. John D. Howard, the head of Bear Stearns' merchant-banking business, said through a spokesperson that while he couldn't comment on the company's stock price, he has ``great confidence in the management team of ACA.''

Bear Stearns last month agreed to extend a $1.6 billion loan to one of its two hedge funds that almost collapsed because of CDO bets.

ACA wrote contracts that represented AAA rated pieces of so-called collateralized debt obligations made up of derivative versions of subprime bonds. CDOs package securities such as mortgage bonds, then parcel them out to investors in different slices with different credit ratings. It was part of $15.3 billion total to CDOs of mortgage bonds. ACA also wrote contracts on $400 million in exposure to a CDO of CDO bonds, compared with $911 million of adjusted book value.

Separate Exposure

The company in May said it had $118 million in separate exposure to mortgage- and asset-backed bonds that wasn't in derivative form. At the time, ACA said its exposure through derivatives to subprime securities totaled $13.8 billion, and that 45 percent of those positions were linked to bonds created last year, and 1 percent of the bonds were from this year.

ACA Chief Executive Officer Alan Roseman said on an earnings call that month that ACA was being more cautious by writing derivatives that required higher losses before they affected his company.

ACA was the eighth-largest manager of CDOs made up of asset-backed debt or related derivatives on Dec. 31, overseeing 12 vehicles that had issued $10.4 billion in securities, according to Standard & Poor's. Moody's Investors Service said July 11 that it may cut $5 billion of such securities; the firm and rival S&P last week downgraded billions of the underlying bonds.

Derivatives are financial instruments used to hedge risks or for speculation. Credit-default swaps on asset-backed bonds offer payments to buyers of protection if the debt isn't repaid as expected; they make regular insurance-like payments.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: July 16, 2007 18:13 EDT