NEW YORK Nov 23 Investors in a structured deal sold by UBS that was backed by the debt of financial companies have lost around 90 percent of their investment, Moody's Investors Service said on Friday.
Moody's cut its rating on one tranche of a deal issued via UBS UBSN.VX nine notches to "C," one step above default, from "Ba2," after unprecedented spread widening in credit default swaps on financial companies included in the deal hit triggers that required it to be unwound.
The unwind of the deal known as a Constant Proportion Debt Obligation (CPDO) caused an approximate 90 percent loss for investors, Moody's said in a statement.
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.
Deals that were based on financial companies have suffered from spread widening caused by losses firms have taken from exposure to residential mortgages.
The downgrade impacts 11.5 million euros (US$17.04 million) of debt that was due in 2017. Forty one million euros of the notes were bought back and canceled before the cash out occurred, Moody's said.
Moody's has also placed under review for downgrade 340 million euros worth of debt from five CPDOs that are also exposed to financial companies.
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(Reporting by Karen Brettell; Editing by Chizu Nomiyama)