Fitch Cuts Ratings On DBS, Lehman Brothers CDOs

Source : The Business Times, October 9, 2007

FITCH Ratings cut ratings on two Asian collateralised debt obligations linked to company debt, indicating an increased risk of default, the company said yesterday.

Fitch lowered a US$50.9 million synthetic CDO that is managed by DBS Group Holdings Ltd by one level to AA+, the second-highest investment-grade. Fitch also cut a US$12.6 million synthetic CDO arranged by Lehman Brothers Holdings Inc by two levels to A.

Investors are shunning CDOs and other credit assets on concerns that losses on US home loans to buyers with poor credit records are spreading to other credit markets. Sales of CDOs, once the fastest-growing part of the debt market, fell to US$16 billion worldwide in September, the lowest in 21 months, according to Morgan Stanley.

CDOs are securities that pool loans, bonds or credit-default swaps and use the income to pay investors. The securities are divided into different parts of varying risk and return. Synthetic CDOs package credit-default swaps, which are contracts investors use to speculate on a company's ability to pay debt.

DBS, Singapore's biggest bank, said in August it had S$2.4 billion at risk from CDOs, more than earlier stated, after an entity it manages had to seek funding.

The Singapore-based bank sold about US$30.8 million of synthetic CDOs through a special purpose vehicle, Fitch Ratings said on Sept 6.

The DBS-managed CDO has total downgrades of 128 levels and upgrades of 83 levels among its portfolio of credits. There are also nine contracts that are on watch for downgrade due to leveraged buyouts, Fitch said.

The CDO arranged by Lehman, which is referencing 125 global corporate credits at the close of October 2006, has about 4.4 per cent in assets below investment grade, Fitch said in a report out yesterday. Previously, it didn't have any.

The portfolio also contains several credits that are on rating watch negative due to leveraged buyouts. The note proceeds are invested in General Electric Capital Corp floating-rate notes due January 2013, according to Fitch.

One in five managers of CDOs is likely to be forced to cut costs or go out of business as investors avoid the securities following losses on sub-prime debt, Fitch said on Sept 24.

More funds are likely to suffer over the next year as demand for CDOs falls, putting pressure on asset managers who use the securities to generate fee income, it said. --Bloomberg