ACA Paid Banks $209 Million to End $65 Billion Swaps

(Corrects loss for year-end in fifth paragraph.)

ACA Financial Guaranty Corp., the bond insurer that lost its investment-grade credit ratings in December, paid $209 million to terminate $65 billion in credit- default swap contracts.

ACA also gave banks $950 million in surplus notes to compensate them for canceling the contracts, the New York-based company said today in a filing with Maryland insurance regulators. A total of $1 billion in surplus notes were issued with ACA Capital Holdings Inc., the insurer's holding company, receiving a 5 percent interest.

``These actions were in full settlement of any and all claims of the swap counterparties under their insured credit swaps,'' the company said.

ACA announced earlier this month that it had reached an agreement with its counterparties to cancel the contracts in exchange for an undisclosed amount of cash and a 95 percent residual interest in its insurance unit. The deal is the latest so-called commutation allowing a bond insurer to tear up a contract for less than its value by giving banks upfront cash payments.

ACA reported losses of $8.6 billion on its swaps at the end of 2007, according to a first-quarter regulatory filing posted on the company's Web site. It listed assets of $698 million at yearend.

ACA no longer insures structured-finance securities and now only guarantees municipal bonds. The insurance unit now has enough assets to meet its obligations to municipal-bond policyholders, Maryland insurance regulators said this month.

The insurance unit will go into run-off, meaning it will seek to meet its existing obligations and not write additional policies.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net

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