Fitch Ratings cut ratings on two Asian collateralized debt obligations, indicating an increased risk of default, it said yesterday.
Fitch lowered a US$50.9 million synthetic CDO that is managed by DBS Group Holdings Ltd by one level to AA+, the second-highest investment-grade rating. Fitch also cut the rating by two levels to A on a US$12.6 million synthetic CDO arranged by Lehman Brothers Special Financing Inc.
Sales of CDOs, once the fastest-growing part of the debt market, fell to the least in more than a year in August as investors worried about losses on US home loans in the underlying collateral pools. Defaults on subprime mortgages, loans to home buyers with poor credit records, led to rating cuts on 316 CDO bonds in August compared with 54 upgrades, according to a Sept. 5 report by Morgan Stanley.
CDOs are securities that pool loans, bonds or credit-default swaps and then use the income to pay investors. The securities are divided into different parts of varying risk and return. Synthetic CDOs package credit-default swaps, which are contracts investors use to speculate on a firm's ability to repay debt.
About US$16 billion of CDOs were issued in August, down from US$157 billion in March, the most active month of this year, JPMorgan Chase & Co analysts said in a Sept. 10 report. About US$60 billion of the securities were sold in June.
DBS Bank, said in August it had S$2.4 billion (US$1.6 billion) at risk from CDOs after an entity it manages had to seek funding.
The bank sold about US$30.8 million worth of synthetic CDOs through a special purpose vehicle, Fitch Ratings said on Sept. 6.
The DBS-managed CDO has 128 notches downgrade and 83 notches upgrade among its portfolio of credits. There are also nine contracts that are on watch for downgrade, Fitch said.
The other CDO, which is referencing 125 global corporate credits at the close of last October, has about 4.4 percent in assets below investment grade, Fitch said.
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