Here’s more grist for the current debate around CDOs and where the market is pricing them.
Standard & Poor’s announced late Wednesday some grim news on a CDO called Adams Square I (big hat tip to Calculated Risk):
Standard & Poor’s Ratings Services today lowered its ratings to ‘D’ on the senior swap and the class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I Ltd. The downgrades follow notice from the trustee that the portfolio collateral has been liquidated and the credit default swaps for the transaction terminated.
Adams Square went into liquidation in November, but the results of the asset sale have only just filtered through. Adams Square I has been liquidated at less than 25 per cent of par value. Which, in financial parlance, is a wipeout. As S&P explain:
Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.
In other words, note holders got nothing (which seems to be contrary to what Bloomberg are reporting). AAA notes? Nothing. Not a penny. This is a fairly big leap from even the most dire CDO news we’ve heard in the past couple months, where losses of the 10-30 per cent order were the most bearish estimates for AAA tranches.
Proceeds from the Adams Square I liquidation weren’t even sufficient to cover the termination payments to the CDS counterparty (Adams Square is, or was, a hybrid CDO, containing straightforward ABS and also CDS on ABS). Unable to meet its CDS payments, Adams Square had to draw down the balance from the super-senior swap counterparty. Thus there was no money left to pay the actual owners of the CDO - the bondholders.
Adams Square, which was arranged by Credit Suisse, had 79 per cent of its total RMBS collateral downgraded by the rating agencies in October.
The whole liquidation was pushed through by the senior note holders. Generic to most CDOs is the rule that if an “event of default” trigger is tripped (the basis for these triggers varies) then the most senior note holders acquire control of the right to liquidate the CDO, should they so desire (otherwise they can allow it to keep running). In the case of Adams Square, the senior note holders were the super-senior counterparties.
As of December 3, 33 CDOs have reported events of default to S&P. So how many senior note holders will decide to take the same action as Adams Square?
There is also an interesting parallel here with E-trade. As we mentioned Wednesday, there’s a whole debate raging about whether its selloff of a $3bn basket of ABS at 27 cents in the dollar amounts to an meaningful price point or not. It’s worth reading about the whole brouhahah here.
More CDO fun later.
