S&P likely to cut derivative deals on Lehman, AIG

NEW YORK (Reuters) - Standard & Poor's on Tuesday said it will likely downgrade a large number of credit derivative deals with exposure to American International Group (AIG.N) and Lehman Brothers LEH.N after Lehman defaulted and AIG was downgraded.

Both companies were included in a large number of so-called synthetic collateralized debt obligations (CDOs), which in turn will pressure the ratings of the deals, S&P said in a statement.

Investors in synthetic CDOs sell protection on portfolios of credit default swaps, and are leveraged to increase returns.

The deals gained in popularity during 2005 and 2006 as tight credit spreads encouraged investors to seek out higher returns. They have since sustained large losses as credit spreads widened.

Lehman and AIG are included in 2,634 tranches of 1,889 synthetic CDOs rated by S&P, the rating agency said.

A large portion of these transactions, however, have overlapping exposure to both Lehman Brothers and AIG," S&P added.

(Reporting by Karen Brettell; Editing by Leslie Adler)