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S&P Lowers CDO Assumptions

Bloomberg is reporting that Standard and Poor’s has lowered its assumptions for how much money investors will recover after defaults of mortgage related collaterized debt obligations.  Many view this as a sign that S&P may be preparing to add to the record number of downgrades already present.

Mortgage-linked CDOs have been the biggest source of more than $320 billion of asset writedowns and credit losses since the beginning of last year.  These writedowns have come primarily from classes once rated AAA or Aaa. 

According to Brian James, a partner at Link Global Solutions, “further rating-agency action will cause banks who hold hte majority of AAA bonds to re-evaluate their strategy.  So far they have been more comfortable writing down their positions in hopes of better recoveries.”

A statement released this week from S&P announced that the most senior bonds from CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing.   

One possible outgrowth of these reductions could be an increase in a secondary market where holders are forced to entertain the bid side of the market. 

According to S&P, their structured-finance ratings only reflect the odds that investors will receive timely interest payments and the return of their principal by the debt’s maturity date. 

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