S&P Says State Street CDO Liquidates; Ratings Slashed (Update1)
By Jody Shenn
Nov. 8 (Bloomberg) -- Standard & Poor's said a collateralized debt obligation managed by State Street Corp. began liquidating its assets, prompting the ratings firm to slice the investment vehicle's ratings as much as 18 levels.
The ratings on the most senior class of Carina CDO Ltd. were lowered to BB, two levels below investment grade, from AAA, while another AAA class was slashed 18 steps to CCC-. The chance of material losses to noteholders is high, New York-based S&P said.
Carina is the
first CDO to began unwinding after a slump in the credit worthiness of the underlying assets, S&P said.
Thirteen others have informed S&P of an event of default, a precursor to liquidation. A widespread fire sale by CDOs, which package asset-backed securities and resell them in pieces, may further exacerbate declines in subprime-mortgage securities.
``We believe the liquidation process has begun'' for Carina, S&P said in the statement.
Investors are already concerned about forced assets sales by structured investment vehicles, or SIVs, which own about $300 billion of securities and have dumped more than $75 billion after being unable to finance themselves. U.S. Treasury Secretary Henry Paulson was worried enough to push the nation's largest banks to set up a fund to buy some of the assets.
The decline in the value of CDOs and subprime-mortgage securities prompted banks including Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley to write down their holdings by at least $30 billion.
`Depressed Prices'
S&P said on Oct. 22 it may lower ratings on $20.6 billion of CDOs as defaults on subprime mortgages within the securities rose to records. Some bonds have fallen as much as 80 cents on the dollar as delinquencies rose, contaminating debt worldwide.
Carina was originally a $1.5 billion CDO issued in September 2006, according to data compiled by Bloomberg. Carolyn Cichon, a spokeswoman for State Street, didn't immediately return a telephone call for comment.
Senior noteholders of the CDO decided to liquidate, S&P said. The firm didn't identify the senior investors.
The securities will be sold at ``what will most assuredly be depressed prices,'' S&P said.
Events of default, triggered by ratings cuts to holdings of the CDOs, can force the transactions to liquidate, S&P said last week. Alternatively, the events would result in all payments being diverted to the most senior classes, whose owners may vote on whether to liquidate, S&P said.
Carina's default event occurred after the credit quality of its collateral fell below a predetermined level, triggering the notice.
Unwilling Noteholders
Most CDO noteholders would be unwilling to force the entity to liquidate because they would still end up losing money, Anthony Thompson, a CDO analyst at Deutsche Bank AG in New York said in a Nov. 5 report.
``Many investors would be loathe to exercise such an option,'' Thompson said.
When CDOs made up of high-yield corporate bonds experienced default events earlier this decade, few senior investors forced them to unwind, Vishwanath Tirupattur, a CDO analyst at Morgan Stanley in New York, said on a conference call with investors this week.
``On the other hand, the investors of the senior-most classes were very different than they are today,'' when more are held by dealers who must already recognize regular changes in the CDOs' values, Tirupattur said. ``So, the possibility of a liquidation is somewhat higher than in the past.''
S&P said it made the downgrades of Carina assuming the assets will be sold. If the liquidation notice is rescinded, S&P said the ratings on the top classes would be reduced by one or two levels, based on a decline in the credit quality of the securities.
To contact the reporter on this story: Jody Shenn in New York at
jshenn@bloomberg.net
Last Updated: November 8, 2007 19:14 EST
http://www.bloomberg.com/apps/news?pid=20601009&sid=aZe.mdJ82ndE&refer=bond
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