S&P may cut $578 billion in corporate CDOs

 @ibtimes
on September 17 2009 5:16 PM

Standard & Poor's may downgrade around $578 billion of collateralized debt obligations backed by corporate debt as a result of changes the rating agency is making to the way it rates the deals, S&P said on Thursday.

S&P is changing its criteria for rating CDOs after being criticized for awarding high ratings to risky deals that in many cases have lost all, or most of their value.

Losses from the deals, portfolios of debt sliced into pieces of varying risk and return, helped spark the financial crises that caused the downfall of Lehman Brothers and American International Group .

Corporate deals backed by credit default swaps, contracts that are used to insure against a borrower's default, are likely to be cut by four notches on average, S&P said in a statement.

The top pieces of these deals currently rated AAA are likely to be cut by two to three notches while junior AAA-rated deals are expected to be cut by four notches, the rating agency said.

Around 4,790 CDO tranches will be placed on review for downgrade when the rating agency implements the changes, which will include new stress tests, concentration limits and minimum capital levels, S&P said.

Deals backed by corporate bonds are likely to be cut by three notches on average, with the most senior AAA-rated pieces likely to be cut by one-to-two notches, S&P said.

S&P said it will adjust the ratings in light of the new criteria over the coming months.

(Reporting by Karen Brettell; Editing by Andrea Ricci)

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