Funds News

Fitch subprime downgrades hit Barclays, Merrill

NEW YORK (Reuters) - Subprime bonds sold by Barclays Plc, Merrill Lynch & Co. and Credit Suisse drew the first downgrades among some of the worst performing deals in an unfolding review, Fitch Ratings said on Wednesday.

The ratings company cut $2.4 billion in bonds and affirmed designations on another $20 billion as it started delivering results from an analysis of 170 deals, it said in a statement. The deals acted on on Wednesday were “some of the most poorly performing deals” from the list created on July 12, it said.

Fitch's actions extend a dizzying list of downgrades from rating companies that last month sent subprime bond indexes to record lows and caused seizures in markets for new securities that are dominated by Wall Street firms. While investment banks such as Barclays BARC.L have been instrumental in providing credit for home loans by making bonds, they are now being blamed for lax underwriting standards that are leading to a surge in defaults and a budding credit crunch.

Half of the downgrades were on mortgage bonds issued by Barclays' Structured Asset Backed Receivables (SABR) LLC Trust, Fitch said. Those deals were dominated by loans made by Fremont General Corp. FMT.N and WMC Mortgage, a unit of General Electric Co. GE.N

Fitch, which also affirmed ratings on $6.2 billion in SABR bonds, in a separate statement urged analysts to note that higher-rated subprime securities are still sound. Deals reviewed for Wednesday from Wells Fargo & Co. WFC.N and Goldman Sachs Group Inc. GS.N received only affirmations.

“The fundamental soundness of highly rated securities is evidenced by the ability of these securities to withstand substantially higher loss levels than forecasted,” Glenn Costello, co-head of Fitch’s residential mortgage bond group, said in a statement.

Reviews follow a move to strengthen criteria for rating mortgages, Fitch said. The changes include the rating company increasing assumptions for default on subprime loans whose monthly payments can surge after an initial period, creating “payment shock” to the homeowner.

In other transactions, Fitch lowered ratings on $448 million of subprime bonds from Merrill Lynch's MER.N First Franklin. The First Franklin deals under review also drew $5.6 billion in affirmations, Fitch said.

Cuts on $395.1 million from Credit Suisse's CSGN.VX Home Equity Asset Trust (HEAT) deals under review compared with $3.28 billion in affirmations, Fitch said. Downgrades and affirmations on Aegis Mortgage Corp.'s subprime deals totaled $312 million and $1 billion, respectively, it said.

The rating company also lowered ratings on $18.3 million in subprime debt sold by Carrington Mortgage Loan Trust as it affirmed $2.58 billion from the same transactions.