Auto parts supplier Delphi Corp.'s bankruptcy is expected to add some pressure on European CDO ratings in the near term - but the impact is expected to be largely felt on the synthetic side, said market analysts.

Standard & Poor's said that 842 of its publicly and privately rated CDOs have Delphi in their reference portfolios, with 638 of these being European transactions - a smaller number were originated in North America and Japan. S&P estimates that roughly one-third of the synthetic CDOs it rates that reference Delphi could be downgraded on one or more of their rated tranches.

Similarly, Fitch Ratings reported in a press release that about 35% of static synthetic European CDO transactions have Delphi exposure and a third of these are expected to be downgraded between one and two notches. Fitch said that Delphi is the third most referenced sub-investment grade name within its index of static synthetic CDOs.

The Delphi bankruptcy will have no immediate impact on any of the 67 U.S. cash flow CDOs that have exposure to the name because these deals are not as highly levered.

While it's still not clear what number of European cashflow CDOs actually have exposure to the Delphi name, S&P analysts said they were currently looking into the matter. Should a significant number of deals be identified, S&P would issue a statement this week.

Sources at Deutsche Bank Securities said in a report last week that the bankruptcy would have no immediate impact on European cashflow CDOs. "First of all there are not that many cashflow European CDOs and those that the market does see are typically leveraged loan and mainly SME CDOs, so it's unlikely that we'll have any significant number of these transactions tied to Delphi," said one analyst.

Despite the CDO market getting off relatively easy, the question now is whether this recent bankruptcy is a harbinger of things to come in what is otherwise a robust credit environment. According to Deutsche Bank, overall rating trends in the European CDO market are firmly positive, with 184 upgrades versus 57 downgrades so far this year. This is attributed to underlying credit stabilization and de-leveraging of the market along with the reduced time to maturity as the market ages.

"Leverage plays an important role in the severity of downgrade, CDO-squared transactions have greater leverage and will generally be subject to more severe downgrades," said Fitch Managing Director Kenneth Gill. Despite being a widely referenced name, Delphi's impact will be less detrimental than previous high-profile credit events given the benign credit environment, with few credit events and limited

credit migration over the past two years.

But analysts at Deutsche Bank added that the benign overall European CDO rating trend might not hold. Moody's Investors Service reported global defaults jumped from $1.4 billion in 2Q05 to $14 billion in 3Q05, fueled by a number of large-scale bankruptcies. The global default rate rose to 2% in 3Q05, and Moody's expects defaults to reach 3.2% by next year.

Both Moody's and S&P announced that additional rating actions are anticipated for General Motors Corp.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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