NEW YORK, April 26 (Reuters) - Ratings may be cut on collateralized debt obligations by this summer as the subprime loans that back the debt structures continue to sour, according to a partner at law firm Clifford Chance.
Moody’s Investors Service and Standard & Poor’s may begin to downgrade credit ratings of CDOs in coming months after receiving monthly and quarterly reports from bond managers, said Steve Kolyer, a partner at Clifford Chance, which is an outside counsel to S&P.
CDOs are pools of debt products that can include debt ranging from highly rated bonds, junk bonds and riskier mortgages.
“There are going to be losses,” Kolyer said at a briefing on subprime loans on Thursday in New York. “That’s when there will be a reassessment of the credit grades of a lot of the instruments that were sold out of the CDOs. That’s when there will be further dislocation.”
Concerns about delinquencies and defaults on high-risk mortgages spurred weaker performance of subprime mortgage bonds and raised worries that insurance companies and pension may be at risk. If rating companies begin to downgrade securities to junk status, some investors may be forced to sell assets they bought when they were initially rated high-grade.
Moody’s last month cut ratings on nine classes of subprime bonds sold by securities units of UBS AG UBSN.VX and Goldman Sachs Group Inc. (GS.N), and cited potential cuts on dozens more from other issuers.
“The steady increase in the riskiness of loans made to subprime borrowers in recent years and the recent slowing in home price appreciation have been major contributors” to weak performance of subprime loans overall, Moody’s analysts said in a March 16 report.