Moody's Investors Service found the number of downgrades of asset-backed securities rated by the agency decreased 50% in the first quarter of 2004 compared to the prior quarter, according to its soon-to-be released quarterly update. The data is encouraging, backing up mainstream commentary that the economy and the capital markets have indeed turned a pivotal corner.

Of the 84 upgrades during the first quarter, securities backed by auto loans made up nearly half, or 41 of that amount, the agency said. In fact, upgrade activity in 2004 is poised to easily surpass that of 2003, said Moody's analysts. The equipment lease sector saw its first upgrades since 1998, for a tally of l6. Furthermore, three structured settlement transactions sponsored by J.G. Wentworth represented the first such deals to be upgraded by the agency.

It was no surprise that approximately 90% of the downgrades in the first quarter resulted from poor asset performance in the manufactured housing securitizations. One issuer, Oakwood Homes, accounted for 45% of the ABS downgrades. In all, 104 senior, mezzanine and subordinate classes from 18 Oakwood securitizations were downgraded, the result of continued deterioration in the performance of the underlying collateral pools, Moody's analysts said.

Of the 316 rating changes in the first quarter, downgrades totaled 232, affecting $11.4 billion in securities. Of that, 17% of all downgrades - or 40 in all - came from the CDO sector. This pace was a 66% decrease from 4Q03 and the best the CDO sector has experienced since the first quarter of 2001, analysts said.

A legal challenge to the New York Contraband Statutes, rather than credit deterioration, was key to the 27 downgrades of tobacco settlement-related securitizations occurring in late March. The home equity and small business loan sectors experienced 18 downgrades. Small business loan downgrades were the result of just one issuer, First International Bank (UPS Capital Business Credit), whereas home equity downgrades were spread among several issuers. And the beleaguered aircraft lease and franchise loan sectors continued their downgrade spiral from 3Q01, accounting for 13 and three downgrades, respectively, in the first quarter.

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