CDO deals resurface but down 90 pct in Q1-report

NEW YORK, April 9 (Reuters) - Issuance of collateralized debt obligations began to reemerge in March though totals for the first quarter still ended down 90 percent from a year earlier, according to a Morgan Stanley report on Wednesday.

CDOs are complex bonds that pool securities to boost yield and in theory spread risk.

About $13.4 billion of CDOs were issued in March, up from $3.3 billion in January and February, according to Morgan Stanley data. The first quarter total of $16.7 billion was down from $165 billion a year earlier.

CDO issuance seized up late last summer as subprime mortgages used to create many of the securities plummeted in value. The uptick in March stemmed partly from deals being restructured or created to clear a backlog of debt that had been warehoused for CDOs, according to Morgan Stanley.

All of the CDO issuance in March came from collateralized loan obligations, either middle market or leveraged loan CLOs, Morgan Stanley said. U.S. dollar-denominated transactions accounted for 61 percent of issuance, with euro-denominated transactions making up the rest.

CDOs had helped fuel the U.S. mortgage lending boom by providing a source of demand for risky mortgages, which were repackaged and sold to investors across the globe. As more of the risky mortgages began to default last year, rating agencies downgraded hundreds of billions of dollars of CDOs, forcing some into technical default. For details see [ID:nN08339143].

In the first quarter, an unprecedented 4,561 rating actions were taken on CDOs, of which 4,485 were downgrades, Morgan Stanley said.

Reporting by Dena Aubin; additional reporting by Walden Siew, Editing by Chizu Nomiyama