Sunday, February 17, 2008

Moody's downgrades 16 CPDOs

(Reuters) - Moody's Investors Service downgraded ratings on 1.1 billion euros ($1.6 billion) worth of constant proportion debt obligations (CPDOs) on Friday after their net asset values fell by 25 to 60 percent.

The move drove credit default swaps (CDS) indexes to near record wide levels on fears that further downgrades could lead to the unwinding of these structured credit products.

"People are concerned that if these things are downgraded, we will see more unwinds," said David Brickman, a credit strategist at Lehman Brothers.

The standard CPDO sells protection -- a bet that companies will not default -- on two indexes of investment-grade CDS, the Markit iTraxx Europe and CDX 125 in the United States.

CPDOs aim to pay high fixed returns, typically 200 basis points over Libor for triple-A rated paper. They put investors' money into cash accounts and then leverage that capital by up to 15 times in making bets on the indexes.

As indexes have widened, the net asset value of CPDOs has fallen. If the net asset value falls by more than 90 percent, the CPDO has a trigger that forces it to unwind.

So far at least three CPDOs, which sold protection specificallyi on financial companies, have hit liquidation triggers.

The Moody's downgrades affected 16 more diversified corporate CPDOs, 42 percent of the total volume it has rated. Their ratings fell to as low as A2, an investment-grade rating five notches above junk.

The ratings agency kept the CPDOs on review for further possible downgrades, however, saying it would update its analytical approach to take into account current spread volatility.

FEARS OVERDONE

Citigroup analysts said recent market fears that CPDO unwindings would cause a prolonged disruption in the credit markets were an over-reaction. They cited two reasons.

First, CPDO volumes are small, with about $3.5 billion issued publicly.

"Even assuming maximum leverage and even if all the different deals were to be unwound simultaneously, we would still only be talking about $25 billion of index positions in each of iTraxx and CDX," they wrote in a note to investors.

"That is large, especially in a nervous market, but scarcely equal to the typical daily traded volume in each of the indexes," they added.

Furthermore, spreads on the two investment grade indexes would have to widen by another roughly 100 basis points for most of the bigger, diversified CPDOs to unwind, the Citigroup analysts found, based on an average net asset value at about 50 percent of par.

Net asset values on these deals had fallen to between 40 percent and 75 percent, Moody's said.

What is more likely to be happening, the analysts said, is that some investors have decided to sell CPDO holdings back to dealers, who then unwind that part of the deal.


Paris, February 15, 2008 -- Moody's Investors Service today downgraded, and left on review for further possible downgrade, 16 Constant Proportion Debt Obligations (CPDOs). These transactions make up 42% of the total volume of CPDOs rated by Moody's. The transactions are market value synthetic CDOs which are exposed to spread movements of the iTraxx Europe and CDX.NA.IG indices.

Today's rating actions are a response to the widening of these indices' weighted average spreads to very high levels. The combined weighted average index spread has increased from approximately 35 basis points when many of these transactions closed to approximately 120 basis points today. In addition to widening, the spread remains highly volatile: the combined weighted average index has increased by 35 basis points in the last month alone. Over the next few weeks, Moody's will be updating its analytical approach to take into account the current high spread volatility environment. As a result, the ratings have been left on review.

The leverage in these CPDOs range between 6 and 15 times, making each transaction's net asset value (NAV) very sensitive to the recent spread widening. As a result, the NAVs of these transactions have fallen to between 40% and 75%. The NAV is the aggregate value of the assets of the SPV. This is usually the sum of the cash deposit account and the marked-to-market value of the leveraged credit default swap position. At a NAV of 10%, most of these transactions would unwind, resulting in an approximate 90% loss to investors.

Today's rating actions are as follows:

Series 5 USD 10,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 6 JPY 2,500,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 7 EUR 325,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 8 USD 100,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 2 USD 25,000,000 SURF CPDO Issued by Castle Finance II Limited

Current rating: A2, on review for possible downgrade Prior rating: Aa1

Series 9 EUR 60,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 10 EUR 75,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 12 EUR 50,000,000 SURF CPDO Issued by Castle Finance I Limited

Current rating: Aa3, on review for possible downgrade

Prior rating: Aaa

Series 2006-1 USD 25,000,000 Credit Linked Notes Issued by Thebes Capital PLC

Current rating: A2, on review for possible downgrade

Prior rating: Aa1

Series 2007-1 USD 25,000,000 "Artemis" DPI Notes issued by Thebes Capital PLC

Current rating: A1, on review for possible downgrade

Prior rating: Aaa

Series 2007-2 EUR 4,000,000 "Artemis" DPI Notes issued by Thebes Capital PLC

Current rating: A1, on review for possible downgrade

Prior rating: Aaa

Series DE EUR 10,000,000 RECIPES Notes Issued by Aquarius + Investments PLC

Current rating: A2, on review for possible downgrade

Prior rating: Aa1

Series 55 JPY 30,000,000,000 REDI Notes Issued by Clear Plc

Current rating: Aa3, on review for possible downgrade

Prior rating: Aa1

Series 2006-2 EUR 50,000,000 Antara Capital Dynamic Participation Investment Return Obligations Issued by Ruby Finance Plc

Current rating: A2, on review for possible downgrade

Prior rating: Aa2

Series 2007-2 EUR 135,000,000 Ulisse Capital CPDO issued by Ruby Finance

Current rating: Aa3, on review for possible downgrade

Prior rating: Aaa

Series 2006-3 EUR 50,000,000 RIDERS Notes due 2018 issued by Magnolia Finance IV plc

Current rating: A2, on review for possible downgrade

Prior rating: Aa3

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