Dec. 27 (Bloomberg) -- ACA Capital Holdings Inc., the bond insurer that lost its investment-grade credit rating last week, agreed to give control to regulators to avert bankruptcy.

ACA Financial Guaranty Corp., a unit of ACA Capital, will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends, the New York- based company said in a filing with the Securities & Exchange Commission yesterday.

``The events referred to are not the initiation of any type of formal delinquency proceedings by the commissioner against ACA FG,'' ACA Capital said in a statement on Business Wire. The company entered into ``a consent agreement and a representation letter with the commissioner'' in Maryland, the company said.

S&P sliced ACA's rating 12 levels to CCC, casting doubt on more than $75 billion of debt the company guarantees, including $69 billion of securities such as collateralized debt obligations. ACA reached agreements to avoid posting collateral until Jan. 18 against credit derivatives it uses to insure the debt. The regulator held off filing delinquency proceedings while ACA seeks ways to raise capital.

``ACA is still in deep trouble,'' said Donald Light, senior analyst with Celent, a Boston-based financial research and consulting firm. ``Unless it gets a capital infusion quickly, these recent moves are only delaying the inevitable.''

If ACA is downgraded below BBB+ and is unable to obtain long term forbearance agreements on its swap contracts resulting in ``insufficient protection of ACA's policyholders and creditors or to the general public,'' regulators may request ACA be placed under conservation, rehabilitation or liquidation, according to a consent order signed by Maryland Insurance Commissioner Ralph Tyler and dated Dec. 19.

Canadian Imperial

Canadian Imperial Bank of Commerce said last week that it may write down the value of subprime securities it holds by $2 billion because they were insured by ACA. CDOs are created by packaging debt or derivatives into new securities with varying ratings.

Credit rating companies are reviewing MBIA Inc., Ambac Financial Group Inc. and other bond insurers on concern they don't have enough money to cover potential losses stemming from accelerating downgrades of the debt they guarantee, potentially endangering $2.4 trillion of securities.

Telephone messages left for ACA's chief executive officer Alan Roseman and for Karen Barrow, a spokeswoman for the Maryland Insurance Administration, weren't immediately returned.

ACA, down 95 percent this year, fell 11 cents to 73 cents in over-the-counter trading in New York.

`Breathing Room'

ACA has $1.1 billion to cover potential losses on $7.1 billion of bonds it's insured, according to data on claims- paying resources or capital posted on its Web site.

``It's given them breathing room and a month to stave off bankruptcy,'' said Nigel Sillis, director of fixed income and currency research at Baring Asset Management in London, which oversees $15 billion of fixed income. ``It still looks like bankruptcy is inevitable.''

ACA, founded in 1997 by former Fitch Ratings executive H. Russell Fraser, was rated A by S&P until Dec. 19, lower than the AAA of its competitors. ACA specialized in guaranteeing municipal bonds with credit ratings that were below those others were willing to guarantee.

ACA backed $51.5 million of bonds sold to finance the construction of a jail in Pinal County, Arizona, and $4.7 million of bonds for the city of Deadwood, South Dakota. ACA shifted its focus to structured finance since 2001.

Home Sales Sour

When home sales soared this decade, bond insurers increased their guarantees of securities created from mortgages, including subprime loans to people with poor credit.

They guaranteed almost $100 billion of CDOs backed by subprime-mortgage securities as of June 30, according to an Aug. 2 report by Fitch. Most of those guarantees are in the form of derivative contracts. Unlike insurance, those contracts are required to be valued at market rates at the end of each quarter.

CIBC, Canada's fifth-biggest bank said ACA insures about $3.5 billion of the bank's U.S. subprime investments.

Merrill Lynch & Co. may have used contracts with ACA Capital to pass off the market risk of $5 billion in CDOs, Roger Freeman, an analyst covering the brokerage industry for Lehman Brothers Holdings Inc., wrote in a Nov. 5 report. If ACA Capital defaults on its swap contracts, Merrill Lynch could recognize unrealized losses on those securities of about $3 billion, Freeman wrote.

Writedowns

Banks and securities firms already have taken more than $97 billion of credit-related writedowns.

MBIA, the largest bond insurer, earlier this month agreed to sell as much as $1 billion of stock to New York-based Warburg Pincus LLC to prevent a potential downgrade. The Armonk, New York-based company dropped 70 percent this year.

Ambac Financial Group Inc., the second-largest of the so- called monolines, took out insurance on $29 billion of the securities it guarantees. The New York-based company's shares slumped 67 percent this year.

Fitch last week gave MBIA, Ambac and New York-based FGIC Corp. four to six weeks to raise at least $1 billion or lose their top ratings. Moody's Investors Service put its top grade for FGIC under review for downgrade on Dec. 14 and assigned a negative outlook to MBIA Insurance Corp.'s Aaa rating. S&P has FGIC on review for a rating cut, and has a negative outlook on MBIA and Ambac.

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net

Last Updated: December 27, 2007 22:06 EST