Moody's cuts six financial CPDOs, one to "junk"

LONDON Nov 16 (Reuters) - Moody's Investors Service has downgraded its ratings on six constant proportion debt obligations (CPDOs) -- leveraged bets on baskets of credit default swaps -- due to their exposure to financial sector companies. Moody's downgraded 387.5 million euros worth of debt issued via UBS (UBSN.VX) and ABN AMRO AAH.AS. It cut one tranche -- 47.5 million euros of notes due 2017 issued via UBS to a "junk" rating of Ba2 from Aa3. It affirmed two other tranches at Aaa. It had warned on Monday it might cut the ratings.

"These rating actions were prompted by the continuing spread widening on the financial names underlying these CPDOs, negatively impacting their net asset values," Moody's said on Thursday.

CPDOs aim to earn high returns by making leveraged bets on credit default swap indexes. The indexes launch new series of contracts every six months, and at this point the CPDOs unwind their existing exposure and replace it with the new index contracts.

If spreads have widened, this results in a loss for the CPDO, as it costs more to unwind the exposure than they have earned.

If the net asset value of a CPDO drops far enough due to losses, it will unwind, leading to steep losses for the end investor.

Moody's said that the CPDOs it had downgraded included exposure to bond guarantors, where credit default swap spreads have widened massively due to worries over their exposure to subprime mortgages, as well as some banks that now have very wide spreads. (Reporting by Richard Barley; Editing by Quentin Bryar)