Default events triggered on at least 7 CDOs-Moody's
Fri Nov 2, 2007 5:37 PM ET
LONDON/NEW YORK, Nov 2 (Reuters) - Moody's Investors Service said on Friday that recent downgrades of U.S. subprime mortgage-backed securities have led to default notices on at least seven collateralized debt obligations linked to those securities.
Moody's has taken rating actions on five of the seven CDOs receiving "Event of Default" notices. Those five have a total par value of about $5.4 billion. Their original ratings ranged from top "AAA" ratings to "B2," or five levels below investment grade.
Details of the other two CDOs were not released.
On Oct. 11 Moody's slashed the ratings on $33.4 billion of subprime residential mortgage-backed securities and has been in the process of reviewing about 500 CDOs linked to those securities.
The ratings cuts on the RMBS triggered the "Event of Default" notices in those CDOs that included automatic "haircuts," or deductions in their par value, for the purpose of calculating the outstanding value of the underlying securities.
A CDO is created by assembling a portfolio of credit risks and dividing it into tranches. At the bottom, the equity tranche is exposed to the first few percent of losses from any credit in the portfolio. At the top, the AAA and super-senior tranches lose only after the rest of the portfolio has defaulted.
An "Event of Default" notice means that senior investors, who hold the tranches at the top, take control of a CDO.
"Senior investors may choose to accelerate the maturity date of their notes, liquidate the assets of the CDO or allow it to continue operating as before," Moody's said in its report.
In the past, however, such notices have rarely led to liquidation, probably because investors would have to sell at what they consider to be distressed prices, the report said.
All three major rating companies are reassessing ratings that investors and Wall Street had used to measure the value of subprime mortgage loans and related securities. Rating downgrades and deteriorating value of the debt have spurred massive writedowns by banks and further losses for investors.
S&P last month put 590 ratings on 176 CDOs on watch for possible rating cuts, affecting $20.6 billion in debt.
Fitch Ratings said this week it may revamp its entire methodology for rating CDOs and may lower ratings on $36.8 billion of related subprime mortgage debt.
tinyurl.com |
