The mess Parmalat has spilled across the capital markets continues to spread, as Fitch Ratings downgraded Tullas CDO last week, an action largely stemming - though not entirely - from its exposure to the Italian milk maker. The CDO, however, does not stand alone, as the rating agency has placed 11 public CDOs on watch for downgrade since late December, just as Parmalat unraveled and filed for Chapter 11 bankruptcy.

In the action on Tullas, about $298 million of class A notes were downgraded to BB-' from BBB-' and $6 million of class B notes were downgraded to B-' from BB-'. Issued in 2001, Tullas was a static $350 million CDO underwritten by Barclays Capital. The deal held ABS collateral, as well as emerging-market bonds and some corporate bonds. The CDO contained assets held physically and through credit-linked notes (CLNs).

Marion Silverman, senior director at Fitch, noted that the CDO included other impaired assets that contributed to the downgrade. The CDO was on a negative watch prior to the fallout from Parmalat, she said.

In all, 4.25% of Tullas' total portfolio, or about $17 million, was exposed to Parmalat, a fairly large exposure to a single obligator.

"That's been a general trend in...older transactions," said John Schiavetta, managing director at Fitch. "They've gotten more diversified over time."

In addition to the Parmalat exposure, lower-than-expected realized recoveries on several other

impaired assets were a factor in the CDO downgrading. The deal's other tranches remain on watch.

The real pain from Parmalat exposure has been felt in the European CDO market. According to Silverman, 69 European market CDOs have Parmalat exposure, with a notional amount of E700 million.

Currently, 29 tranches from 11 global public CDOs and 24 tranches from 22 private CDOs were placed on watch by Fitch. The transactions on watch have a total of E415 million in exposure to Parmalat with the median level of exposure approximately 1%. Those transactions not on watch by Fitch are expected to have sufficient credit enhancement to absorb the loss, assuming a 40% recovery rate. In a press release, Fitch said it expects to resolve all of its reviews by the end of this month.

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