Wednesday, December 19, 2007

CIBC May Take More Writedowns After ACA Downgrade

Dec. 19 (Bloomberg) -- Canadian Imperial Bank of Commerce said it will probably take a ``large'' writedown on its U.S. subprime investments after the credit rating of bond insurer ACA Capital Holdings Inc. was cut by Standard & Poor's.

``CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the first quarter,'' the bank said in a statement today. Canada's fifth-biggest bank said for the first time that ACA insures about $3.5 billion of U.S. subprime investments.

Canadian Imperial has reported more writedowns than any Canadian bank this year after it invested in securities backed by U.S. mortgage loans. The Toronto-based lender has taken pretax writedowns of C$753 million ($750 million) in the past two quarters, and it estimates it had C$225 million in additional writedowns in November.

``It's unlikely that CIBC can consider the counterparty creditworthy,'' and will likely have to take a writedown of as much as $2.4 billion, Dundee Securities Corp. analyst John Aiken said in an interview.

Canadian Imperial fell C$1.45, or 2 percent, to C$70.84 at noon trading on the Toronto Stock Exchange, erasing a gain of as much as 3.5 percent. The stock has fallen 28 percent this year, the worst performer among Canadian bank stocks. Rob McLeod, a bank spokesman, didn't immediately provide a comment.

Rating Cut

ACA Capital had its credit rating cut today by Standard & Poor's to CCC from A, which may trigger a default. If ACA Capital defaults, Canadian Imperial loses the hedge on its investments.

Canadian Imperial has about $9.9 billion in hedged derivatives contracts tied to U.S. subprime mortgages. About a third of that is backed by ACA. The bank said on Dec. 6 that the insurance, or ``counter-party protection'' was worth $1.71 billion on the $3.47 billion in collateralized debt obligations. The bank's fiscal first quarter ends Jan. 31.

ACA Capital is required to post collateral of about $1.7 billion if its credit rating falls below A-, management said during a Nov. 9 conference call. The New York-based company, which is rated only by S&P, wouldn't be able to post that much collateral, it said in a Nov. 19 filing.

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