According to Fitch Ratings, 32  corporate synthetic  CDO  tranches  will  default following  the  recent  ISDA ruling which called a credit event on Ambac Assurance  Corporation

This level of defaults would represent 10% of Fitch's global synthetic CDO tranches.

"Ambac  Assurance is a widely referenced name, present in 58% of the 169 global  Fitch-rated synthetic CDO transactions," said Jeffery Cromartie, senior  director  and  head  of  EMEA  structured credit surveillance at Fitch. "Therefore, Fitch expects to see negative rating pressure as well as principal impairments on exposed tranches rated 'CCC' and below."

However Cromartie said that the impairment of synthetic CDO  tranches  rated  'CCC'  and  below  should not come as a surprise in the current economic climate. Fitch has been expecting impairment in this sector, and the agency's  ratings  as  well as the EMEA sector-wide outlook reports have reflected  this  view  for the last three quarters - specifically in the  'Areas to Watch' section of the sector outlook reports.

Any  impairment  is likely to result in a significant loss to a tranche. For  example,  relative  to  their  respective reference portfolios many tranches  are  less  than  1% thick (from attachment point to detachment point).  As  the  initial  credit  enhancement is largely exhausted, any further  portfolio  losses  are  likely to completely impair an affected tranche.  If a tranche is written down or experiences a payment default, Fitch will downgrade the tranche to 'D'.

No investment grade tranches are facing impairment. Due to a recent wave of  pre-payments  or  bilateral exchanges the number of investment grade tranches  outstanding  has  declined. Currently, less than 5% of the 339 remaining global CDO tranches rated by Fitch are investment grade.

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