NEW YORK, Dec. 19 (UPI) -- Standard & Poor's Corp. cut the rating of troubled U.S. bond insurer ACA Financial Guaranty Corp. to "junk" status Wednesday.
The move -- reducing the investment-grade A rating to non-investment-grade CCC -- could cost banks and local governments billions of dollars, analysts said.
Merrill Lynch & Co., the Canadian Imperial Bank of Commerce, Bear Stearns Cos. and other investment banks had been negotiating a plan to help ACA, The New York Times reported.
The Standard & Poor's move could force the banks to write down billions in mortgage-related debt on which they had bought insurance, the Times said.
Under its debt-insurance contracts, ACA must post collateral if its rating falls below A. The company has said it does not have the resources to put up money.
CIBC said it would probably take a $1.7 billion first-quarter write-down next month associated with the $3.5 billion in mortgage securities it insured with ACA.
S&P said it lowered ACA's rating because the company could face losses exceeding $2.85 billion and could only absorb $650 million in losses.
The ratings agency affirmed AAA ratings for MBIA Inc., Ambac Financial Group Inc., XL Capital Ltd. and Financial Guaranty Insurance Co. but assigned a negative outlook to them.
A negative outlook means the companies have a one-in-two chance of being downgraded in the next three months.
