Last week Salomon Smith Barney's TIERs Corporate Bond Backed Certificates 1998-5 and Lehman Brothers' Corporate Backed Trust Certificates 2001-10 became the latest synthetic deals to get hit by deteriorating corporate credit.

Multiple tranches from both deals were downgraded by Standard & Poor's following the downgrade of Motorola Inc.'s corporate credit rating, which was referenced in both deals.

While S&P had announced its revised "weak-link" methodology the same day as the CDO downgrades, the rating agency said that the change in approach does not apply to either deal, as the revised methodology is only relevant when there's several underlying credits.

The essential difference is that the new methodology focuses on the probability of receiving the cashflow on the bonds, versus the probability of initial default. The change will primarily impact new issues, surveillance and certain emerging market transactions (see also story p.16).

Meanwhile, there have been several synthetic deals downgraded over the past several months, including BarCLO, Bistro, BAC Synthetic CLO 2000-1, Blue Stripe 1999-1, York Funding and Eisberg Finance Ltd. This wave is partly attributable to a rise in "fallen angels" or high quality corporate credits that have fallen below investment grade (see ASR 3/12/01, p.12).

S&P also nicked Motorola's commercial paper rating to A2' from A1'. Moody's Investors Service currently has Motorola's P1' CP rating on watch for downgrade, according to the rating agency.

At this juncture, Motorola has not used the asset-backed commercial paper market for funding, although analysts say it is plausible that Motorola will down the line, as have other telecommunications companies which do not have access to A1/P1/F1 market, inlcuding MCI Worldcom Corp. and Lucent Technologies.

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