CDO mess continues

The mess in CDO markets continue (see the earlier post on settlement problems). This alphaville blog post says:

Standard & Poor’s have just downgraded 153 CDO tranches – all of them European and all of them synthetic; which means they’re based on credit default swaps.

Here’s the release:

LONDON (Standard & Poor’s) May 29, 2008-Standard & Poor’s Ratings Services said today that it has taken credit rating actions on 153 European synthetic collateralized debt obligation (CDO) tranches (see list below).

Specifically, the ratings on:

– 122 tranches were removed from CreditWatch with negative implications and lowered;
– One tranche was lowered;
– One tranche was lowered and placed on CreditWatch negative;
– 28 tranches were lowered and remain on CreditWatch negative;
– One tranche was raised.

The interesting part, though, is that while 39 of the tranches downgraded reference US RMBS, 113 are linked to corporates. Downgrades on corporate CDOs have been rare before now. Moody’s reported in March than just 10tranches of synthetic corporate CDOs were downgraded in 2007, compared to 1,572 structured finance – MBS and ABS – CDOs.

S&P’s action, then, is pretty significant, and reflective of a serious uptick in default risk in the market – perceived and actual.

The rating agency lists some of the key culprits – corporates which have seen severe downgrades and thus impacted CDS referencing them. For now, the list is dominated by subprime casualties – monolines FGIC and ACA, Countrywide Home Loans, ResCap, GMAC. But there are also – in perhaps a taster of things to come – a couple of leveraged buyout names: Alliance Boots, TXU.

Highly leveraged companies are going to see significant rating actions against them if debt market funding conditions don’t improve. And with that, there will be further downgrades, and with them, as above, more trouble for synthetic corporate CDOs.

So, we are seeing concerns in corporate CDOs as well. This is the concern I raised in my CDS report as well.

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2 Responses to “CDO mess continues”

  1. Financial Md » CDO mess continues Says:

    […] Original post by Mostly Economics […]

  2. Credit default swaps: What if they default? « Mostly Economics Says:

    […] default swaps: What if they default? I have been writing on this market quite regularly ( see CDO mess continues, Settlement problems surface in […]

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