ACA Capital Holdings, Inc. (ACAH.PK)

ACA Capital

Here is what they do:
1) Wrap Muni bonds at the 'A' level
2) Insure HIGHER than AAA bonds of corp, mortgage, etc
3) Structure/Manage CDOs

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Some GAAP related issues with the above:
2) When they insure bonds higher than the AAA level they have to mark to market that insurance piece even though they will hold to maturity. When this value changes it affects GAAP income statement. You will see volatility here. However, management understands this and they intend to hold to maturity (where they get back par if there are no losses) so they report 'Net economic income' and if they think something will be a loss then they report that.

3) They have done 20+ CDOS and in the early days 2002-2005 they had to buy all the equity in the CDOs they issued. If you buy all the equity then you have to consolidate the assets and liabilities that go with the equity piece you own. Example:


Suppose you own $20 in equity that is backed by $100 in assets and $80 in liability. Well because of GAAP you have to put the $100 on your asset balance sheet and $80 on your liability side. Now if prices of the assets change to say $70 then you have incurred a loss of $30. This is incorrect, since your ownership is capped at $20, the amount of the equity you own. Non recourse finaning.

Because of GAAP the balance sheet is messy because for all CDOs that they own the entire equity they have added all the respective assets and liabilities to their own balance sheet. It makes the company look levered.

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Now what does all that mean?

So non GAAP book value is 14.35. They will have losses on their CDO equity. We can be very conservative and say that these deals will write down:

ACA ABS 2003-1 (ACA EQUITY = 18M)
ACA ABS 2006-2 (ACA EQUITY = 3.5M)
ACA Aquarius 2006-1 (ACA EQUITY = NONE)
ACA ABS 2006-1 (ACA EQUITY = 1.4M)
ACA ABS 2007-1 (ACA EQUITY = 1.4M)
ACA ABS 2003-2 (ACA EQUITY = 33.5M)

total expected loss = 57.8M

57.8 / 37.1 shares = ($1.55)
Current book value as of 1Q07 = 14.35
Expected book value (not including any earnings if any from other business) = $12.79

THEY HAVE A HEDGE OF $37M ON THEIR CDO EQUITY WHICH I HAVE NOT INCLUDED IN THE CALCULATION.

Now keep in mind that book value is growing over time because of the insurance, cdo fees, and structured credit income. It is expected to grow at $1.70 per year.

At these levels I think if you can stand the noise they should do ok.