CDOs of TCW Group, GSC Face Most Risk of Downgrade (Update2)
By Darrell Hassler
July 12 (Bloomberg) -- TCW Group Inc. and GSC Partners created the most collateralized debt obligations that are now at risk of having their credit ratings slashed because they are backed by some of the worst-performing subprime mortgage bonds.
TCW of Los Angeles and GSC, a New York-based investment firm, manage 12 CDOs that will likely face ratings cut on a portion of the securities they issued, according to a report by Bear Stearns Cos. ACA Capital Holdings Inc., Harding Advisory and Tricadia CDO Management each have four.
Investors may lose as much as $52 billion on CDOs, Zurich- based Credit Suisse Group estimated this week. That was before Standard & Poor's and Moody's Investors Service said they're likely to reduce the ratings of CDOs to match downgrades of bonds that are backed by home loans to people with poor credit.
``There are a few managers whose names crop up more than others,'' Gyan Sinha, an analyst at New York-based Bear Stearns, said in the report. Bear Stearns is the second-largest underwriter of mortgage bonds behind Lehman Brothers Holdings Inc. Sinha didn't return calls seeking comment.
TCW managed $27.6 billion in 30 CDOs containing asset-backed securities as of Dec. 31, according to S&P. Risk Magazine named TCW its 2006 ``CDO Manager of the Year.''
``In light of recent market trends within the mortgage sector, our CDOs are performing in line with expectations,'' TCW said in a statement sent by e-mail. ``We are certainly sensitive to the factors affecting the mortgage industry and are very closely monitoring our risk associated with this sector's performance.''
`We Were Affected'
Tricadia and ACA managed 12 ABS CDOs and Harding managed 10, according to S&P.
GSC managed almost $12 billion as of March 31 in 12 CDOs mainly backed by residential mortgage bonds or derivative versions of them, according to its Web site.
``Our transactions have a high subprime percentage and we were affected by the agencies' re-rating of subprime,'' GSC Partners Managing Director Edward Steffelin said in an interview. The firm has ``steered away'' from securities backed by second- lien loans and mortgages to borrowers with good credit scores who decline to give information such as proof of income, he said.
Fred Bratman, a spokesman for New York-based ACA, declined to immediately comment. Arif Inayat, a co-founder of New York- based Tricadia, declined to comment, and the president of New York-based Harding, Wing Chau, didn't return a call for comment
Fastest Growing
CDOs have been one of the fastest growing areas of the fixed-income market. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained subprime mortgage bonds, according to Moody's. The firm has ratings on more than $1 trillion of CDOs derived from asset-backed debt.
``This is an industry that saw exponential growth and now you're going through one of those market purges where you're shaking out all of the weak players,'' said Mitchell Stapley, chief fixed income officer at Fifth Third Asset Management in Grand Rapids, Michigan. Fifth Third, which manages $21.6 billion, holds some AAA rated pieces of CDOs, Stapley said.
TCW and GSC are large issuers and that may explain why they feature on Bear Stearns' list, Stapley said.
``Given the size and scope of their issuance, they're naturally going to be on the top of any list you're going to have on this,'' Stapley said.
`No Choice'
Bankers and money managers create CDOs by bundling bonds, loans, derivatives and even other CDOs into new securities, some of which get rated as high as AAA. The riskiest parts have no rating and the highest yields because they're first in line for any losses.
Hedge funds and money managers, including other CDOs, own 62 percent of BBB rated pieces of CDOs, according to Charlotte, North Carolina-based Bank of America Corp. The next biggest owners are banks, with 18 percent, followed by broker dealers at 12 percent, the firm said in a report this week.
``Any very active dealer had no choice but to issue CDOs during 2006 and the first part of 2007, and those deals obviously will have some bad collateral,'' said Jeff Meli, an analyst at Barclays Capital in New York. ``There's a question of how aggressive you got.''
Ratings Cuts
Bear Stearns, which itself is the third-largest manager of ABS CDOs, made its list based on the subprime bond downgrades by Moody's and a warning by S&P that it will reduce ratings.
The report was released before Moody's said it may reduce the ratings for $5 billion of CDOs. Moody's had already lowered about $5 billion of bonds backed by subprime mortgages. Loans from New Century Financial Corp., Fremont General Corp., and units of Washington Mutual Inc. and General Electric Co. backed 60 percent of subprime bonds it took action on, Moody's said.
S&P said it may slash CDOs along with $7.35 billion of subprime mortgage bonds.
The firms acted after 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc. The securities firm is based in Arlington, Virginia.
Bear Stearns was forced to extend $1.6 billion of loans to one of its two money-losing hedge funds last month after bad bets on CDOs and mortgage bonds.
One of Tricadia's CDOs, called CDO 2006-7, is most likely to have securities downgraded, according to Bear Stearns. It has almost 43 percent of assets in subprime bonds or related CDOs were or may be cut. That's followed by a CDO called TABS 2006-5, at 40 percent, and the Static Residential CDO 2006-C Ltd., at 39 percent, Bear Stearns found.
Pieces of five CDOs managed by TCW were put on review by Moody's yesterday, along with four managed by GSC, three by ACA, and two by Harding. No CDOs with the name Tricadia were on the list. |
