This happens every week - the Friday CDO downgrade bonanza. On January 4, Standard and Poor’s announced they were putting 149 CDO tranches on review for downgrade. This Friday they followed through:
NEW YORK (Standard & Poor’s) Jan. 11, 2008–Standard & Poor’s Ratings Services today lowered its ratings on 149 tranches from 31 U.S. cash flow and hybrid collateralized debt obligation (CDO) transactions and placed our ratings on four other tranches on CreditWatch with negative implications. The downgraded tranches have a total issuance amount of $8.739 billion. At the same time, we affirmed our ratings on another 46 tranches from these transactions (see list). All of the downgraded tranches come from mezzanine structured finance (SF) CDO of asset-backed securities (ABS), high-grade SF CDO of ABS, or CDO of CDO transactions collateralized either directly or indirectly by U.S. residential mortgage-backed securities (RMBS). The ratings on 54 of the downgraded tranches remain on CreditWatch with negative implications, indicating a significant likelihood of further downgrades.
Which brings the running total to 1,290 tranches, worth $83.5bn, downgraded on 402 CDOs, with 726 tranches still on credit watch.
Significantly, the above downgrades slash a large number of CDOs to junk - there’s an unhealthy preponderance of “C”s in S&P’s accompanying list. No doubt this all tallies with a growing number of CDOs going into default and being accelerated, as we reported last Wednesday.
A hunch, or does a significant amount of this also fit with the Q4s due from Citi and Merrill this week. Both are long on CDO super-senior swaps (via commercial paper LSS conduits, to the tune of nearly $40bn), which are generally speaking, we understand, the “most-senior” class of notes opting to put so many CDOs into acceleration.
