UPDATE 1-Fitch, S&P may cut ratings on subprime debt

(Recasts lead and headline; adds S&P rating action, background on Fitch, byline)

By Neil Shah

NEW YORK, June 22 (Reuters) - Fitch Ratings and Standard & Poor's on Friday said they may issue downgrades for more debt linked to risky subprime mortgages.

Fitch Ratings' derivatives unit said it may cut its ratings on some securities in debt products known as collateralized debt obligations because of exposure to deteriorating subprime loans, which are made to borrowers with patchy credit histories.

The affected collateralized debt obligations, or CDOs, are: Trainer Wortham First Republic CBO III, ACA ABS 2003-1, ACA ABS 2003-2, and Ipswich Street CDO.

Collateralized debt obligations are bonds backed by other debt including corporate bonds, subprime mortgage securities and junk bonds.

Standard & Poor's cut or may cut the ratings of 133 subprime-related securities, potentially affecting about $1 billion in securities, the rating company said. For details, see [ID:nN22183193].

It downgraded 56 classes of residential mortgage-backed securities in total -- 45 groups backed by closed-end, second lien collateral and another 11 subprime classes.

Most of the residential mortgage-backed securities originated in 2005 and 2006, and the percentage of delinquencies in that group has risen to as high as 18 percent, S&P said.

As for Fitch's rating actions, the flagged CDO securities came from "three 2003 diversified (structured finance) CDOs and one high grade CDO issued last year," Fitch said in a statement.

"The rating action is the result of a combination of credit deterioration within the portfolio" and high exposure to "second-lien" or "piggyback" subprime mortgages, Fitch said, referring to the ACA ABS 2003-1 deal.

Piggyback loans allow home buyers to purchase homes without putting any money down by borrowing the cash needed for the down payment.

The majority of the CDO securities identified by Fitch are rated "BBB," the second-lowest investment grade, while most others carried a "BB" rating, or two steps into junk territory.

Credit-rating agencies have recently downgraded some subprime mortgage bonds backed by piggyback loans due to rising delinquencies. For details, see [ID:nN18148463]

Such downgrades have raised concerns among market participants about credit deterioration moving to CDOs that contain subprime-related mortgage bonds.

(Additional reporting by Walden Siew.)