Analysts at Standard & Poor's found that the largest increase in CDO upgrades since 2002 occurred last quarter, but the news was tempered by a sizeable level of downgrade activity. However, the third quarter spelled good news, overall, for the high-yield bond sector.

In the third quarter of 2004, 16 tranches of 10 cash-flow and synthetic transactions were upgraded, topping a record of 11 upgrades seen in 2Q02. Of the 10 transactions, five were high-yield CDOs, four were high yield leveraged loans and one was an ABS CDO structure. But the positive news is more the sector's stabilization than a strong comeback, as 36 ratings downgrades were recorded for the third quarter.

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