Friday, December 21, 2007

Moody's review for banks' CPDOs

(FT Alphaville) The volatility in credit markets appears set to claim fresh victims after Moody’s on Thursday put a number of complex and highly leveraged products, known as CPDOs, on review for downgrade.

The move affects seven deals from the bank that invented the product, ABN Amro, as well as deals from Lehman Brothers, Dresdner Kleinwort, BNP Paribas and Merrill Lynch.

CPDOs (constant proportion debt obligations) are essentially highly leveraged bets on a large portfolio of corporate debt exposures, which carry ultra-safe ratings while promising high returns. They are usually created by selling protection on the main European and US indices of investment grade credit default swaps, which provide a kind of insurance against non-payment of corporate debt.

The bets made through CPDOs are leveraged by 15 times on average, which means the CPDOs’ value can be highly volatile. Moody’s said all the transactions involved had lost about 30 per cent of their value since launch in 2006 or this year.

Moody's puts 11 corporate CPDOs on review for downgrade

EUR 836 million of securities affected

Paris, December 20, 2007 -- Moody's Investors Service today placed 11 CPDOs on review for possible downgrade (35% of the total volume of rated CPDOs). These transactions are market value synthetic CDOs which are exposed to spread movements of the iTraxx Europe and DJ CDX.NA.IG indices.

Today's rating actions are a response to the widening of these indices' weighted average spread. The weighted average index spread has increased from approximately 35 basis points when most of these transactions closed to 65 basis points today. Because these CPDOs are leveraged 15 times (except for the Recipes Notes and the REDI Notes that have a leverage of 13 and 12 respectively) , their net assets values (NAV) are sensitive to the spread widening and have dropped by approximately 30% since closing.

Today's rating actions are as follows:

Series 5 USD10,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 6 JPY2,500,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 7 EUR325,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 8 USD100,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 2 USD25,000,000 SURF CPDO Issued by Castle Finance II Limited

Current rating: Aaa, on review for downgrade

Series 9 EUR60,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 10 EUR75,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aaa, on review for downgrade

Series 2006-1 USD25,000,000 Credit Linked Notes Issued by Thebes Capital PLC

Current rating: Aaa, on review for downgrade

Series 2006-2 EUR50,000,000 Antara Capital Dynamic Participation Investment Return Obligations Issued by Ruby Finance Plc

Current rating: Aa2, on review for downgrade

Series DE EUR10,000,000 RECIPES Notes Issued by Aquarius + Investments PLC

Current rating: Aaa, on review for downgrade

Series 55 JPY30,000,000,000 REDI Notes Issued by CLEAR PLC

Current rating: Aaa, on review for downgrade

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