January 16, 2008 / 4:01 PM / 12 years ago

Moody's cuts some financial backed CPDOs to junk

NEW YORK, Jan 16 (Reuters) - Moody’s Investors Service on Wednesday cut its ratings on 340 million euros ($503 million) worth of Constant Proportion Debt Obligations (CPDOs) into junk territory, due to weakness in credit default swaps on financial companies that back the deals.

The downgrades affect five deals and represent 63 percent of financial-based CPDOs and 11 percent of all CPDOs rated by Moody’s, the rating agency said in a statement.

“These downgrades reflect the negative Net Asset Value (NAV) impact of the continuing widening and the increased volatility of the spreads associated with financial names underlying these CPDOs, particularly monolines and investment banks,” Moody’s said.

CPDOs sell protection on investment-grade corporate credit derivative indexes or baskets of financial credits with up to 15 times leverage, and the leverage can be raised or reduced to take account of market conditions.

The biggest instances of spread widening in financial names from November 27 to January 11 were XL Capital Assurance Inc, part of XL Capital XL.N, which widened to 698 basis points from 481 basis points; Financial Guaranty Insurance co (FGIC), which saw its spreads widen to 696 basis points from 555 basis points; and MBIA Insurance Corp, part of MBIA Inc (MBI.N), which widened to 293 basis points from 179 basis points, Moody’s said.

Three deals were cut to “Ba2,” two levels below investment grade, from “Baa2,” the second-lowest investment grade. The remaining two deals were cut to “B2,” five levels below investment grade, from “A2,” the sixth-highest investment grade.

To see the full Moody’s release, double-click on [ID:nWLB5829]. (Reporting by Karen Brettell; Editing by Jonathan Oatis)

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