U.S. cashflow and synthetic CDOs experienced an uptick in downgrades and fewer upgrades during the first quarter compared to 4Q04, according to a recent report by Standard & Poor's. Driving downgrades were ABS CDOs, which experienced the highest downgrades to upgrades ratio the sector has ever seen -accounting for 23 of the 34 CDO downgrades initiated by S&P in the first quarter. Upgrades were fueled by U.S. cashflow arbitrage corporate high-yield transactions, with a total of 14 out of 27 upgrades. S&P downgraded 18 CDOs in 4Q04, and upgraded 24.

All but one of the ABS CDO downgrades during the quarter occurred on 2001 and 2002 vintages and more than half of the downgrades were initiated on tranches that had already been downgraded - mostly the result of further credit quality deterioration on the underlying collateral.

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