AAA-rated - oh the humility!
Fitch May Cut Credit Ratings on $36.8 Billion of CDOs (Update3)
By Mark Pittman and Jody Shenn
Oct. 29 (Bloomberg) -- Fitch Ratings said it may cut rankings on $36.8 billion of collateralized debt obligations linked to residential mortgage securities.
The company placed $32.6 billion of debt on review for a possible downgrade, according to a statement today. The remaining $4.2 billion had already been under review. Almost $24 billion of the debt had AAA ratings, New York-based Fitch said.
Fitch, a unit of Paris-based Fimalac, follows Moody's Investors Service, which last week cut ratings of CDOs linked to $33 billion of subprime mortgage securities. Lower ratings may force owners to either mark down the value of their holdings, or sell the securities. Moody's, Fitch and Standard & Poor's in July began lowering ratings on hundreds of mortgage-linked securities after their value tumbled as much as 80 cents on the dollar.
``The market at this point no longer believes the rating agencies when it comes to mortgage-related products,'' said David Castillo, who trades CDOs in San Francisco at Further Lane Securities. ``It's merely forcing the hand of investors who are ratings-driven from an investment-criteria perspective.''
Merrill Lynch & Co., the third-biggest securities firm, last week reported writedowns of $8.4 billion, largely because of the tumbling value of CDOs and mortgages made to borrowers with poor credit.
CDOs package debt such as mortgage bonds or loans and slice them into several pieces offering different ratings and risk.
AAA Cuts
All AA, A and BBB rated CDOs are likely to be cut to below investment grade, Fitch said. Speculative grade, or junk, issuers carry ratings of BB+ or lower. About two-thirds of the AAA securities are either mezzanine securities or CDOs of CDOs and are likely to be sliced to between BBB and BB-, Fitch said.
The most severely affected are recent CDOs, which had both the worst-performing subprime mortgage bonds and the highest percentage of those securities as assets, Fitch Ratings Managing Director John Schiavetta said.
``It is clearly subprime that is causing this,'' said Schiavetta, who is based in New York. ``And most of that is from 2005 onward with the bulk of it in '06 and `07.''
Schiavetta predicted that there will be CDOs that will default, including the top-rated AAA parts.
Fitch said it will reduce ratings on some securities starting next week, when it also plans to announce how it will begin examining CDOs' creditworthiness with a new method.
Criticism of ratings companies escalated after the collapse of subprime mortgages roiled global fixed-income markets. S&P, Moody's and Fitch began mass downgrades of the bonds only after some of them had fallen more than half.
Securities and Exchange Commission Chairman Christopher Cox last month said the commission is probing whether Wall Street pressured ratings companies to give top rankings for mortgage bonds.
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