Moody's begins cutting some top-rated CDOs to junk

NEW YORK (Reuters) - Moody's Investors Service on Friday began cutting ratings on pieces of top-rated collateralized debt obligations to junk level due to exposure to $33.4 billion in deteriorating subprime loans.

Moody's said it cut or may downgrade at least 45 CDOs tied to $33.4 billion of subprime mortgage debt cut earlier this month, its biggest action on subprime mortgages to date.

The move is the latest effort by rating agencies to reassess ratings that investors and Wall Street had used to measure the value of subprime mortgage loans and related securities. Rating downgrades and deteriorating value of the debt have spurred massive write-downs by banks and further losses for investors.

"The rating companies are catching up, but it's going to be a long process for the whole work-out of subprime," said Cynthia Cole, a portfolio manager with Allegiant Asset Management in Cleveland, Ohio. "The rating agencies are getting closer to ratings that are where the bonds truly are."

Merrill Lynch & Co. this week said it wrote down $7.9 billion of assets last quarter due to exposure to subprime mortgages and related CDOs. Rival brokerages already had reported $3.6 billion in losses due to their exposure, and further write-downs are expected.

Deteriorating mortgage loans were packaged into bigger, complex bonds known as CDOs that are now being cut and reviewed for further cuts.

The ripple effect from an October 11 rating cuts may affect 461 CDOs in United States and 41 CDOs in Europe, Moody's said.

OOPS

Moody's made its announcements in a series of individual releases and did not provide the total amount of CDOs affected or the total amount of debt affected. Moody's said a full summary may be available at the end of the month.

"It's absurd," said Josh Rosner, a mortgage expert from Graham Fisher, a New York-based investment research firm. "It makes it harder to count the actual downgrades and they're doing it do draw less attention.

"The rating agencies are starting to feel increasingly like Britney Spears in their crashing and burning," Rosner said. "These downgrades feel like 'Oops, I did it again.'"

BOND LOSSES

Ambac Financial Corp's (ABK.N) stock fell and the cost to insure its debt rose on Friday after Moody's ratings actions. ID:nN26339588 The bond insurer posted a third-quarter net loss due to an unrealized loss on credit derivative exposure, the company said this week.

Bond insurer MBIA Inc (MBI.N) also reported a third-quarter loss due to declining value of credit derivatives.

Among its rating actions on Friday, Moody's said debt issued by a Montrose Harbor CDO that was rated "A2," the sixth-highest rating, was cut to "Caa1," seven levels into junk territory.

Debt issued by Kleros Real Estate CDO, a subsidiary of top CDO manager Cohen & Co., based in Philadelphia, saw about $220 million in debt cut or placed on review for further cuts, including one piece of debt lowered to "B1," or four levels below high-grade, from "Baa2," the second-lowest high-grade rating.

"Some have been downgraded, and some have been placed on watch," said Moody's spokesman Michael Adler. "We're just starting the process of what we said we were going to do."